The Impact of a Natural Disaster on Foreign Direct Investment and Vertical Linkages
How do multinational enterprises (MNEs) affect the host country through their vertical industrial linkages when large natural disasters occur? To answer this question, we develop a simple theoretical framework and show that, as trade costs decline, the host country is first dominated by MNEs and then later by local firms. Thus, when natural disasters seriously damage capital, the industrial configurations in the host country switch from domination by MNEs to domination by local firms. The replacement of MNEs with local firms can raise the welfare of the host country.