Essays on the Linkages between Foreign Direct Investment and other Policie

The dissertation investigates the linkages between Foreign Direct Investment (FDI) and other policies, in particular, trade policy and environmental policy.;The first chapter extends the standard trade policy model by incorporating FDI flows into the import-competing industry. The model predicts that increasing inbound FDI flows will lead the host country to reduce the unilateral tariff. Introducing an endogenous FDI policy, the model finds that tariff and FDI tax are complementary, and in particular, an investment agreement which bans FDI tax will lead to a unilateral tariff reduction. This policy interaction has three implications. First, FDI liberalization should reinforce trade liberalization, consistent with the historical observation that trade liberalization and FDI liberalization usually co-move over time. Second, a tariff increase, which encourages inbound FDI, will induce an FDI tax increase, which discourages inbound FDI. This offsetting force due to the policy interaction can help explain why the "tariff-jumping" argument lacks empirical evidence. Third, a failure to incorporate this policy interaction will lead to an underestimate of the gains from FDI liberalization and will miss a substitution force between trade liberalization and FDI liberalization.;The second chapter augments the Grossman and Helpman (1994) model with exogenous inward FDI to study the impact of inward FDI on the trade policy of the investment-host country. The new model predicts that a domestic industry with a higher share of FDI stock would receive less trade protection since too much trade protection would benefit foreign investors at the cost of domestic consumers. Using the industry-level U.S. data from 2000-2012, I find that the pattern of trade protection is broadly consistent with the model predictions. In particular, inward FDI has a significant negative effect on non-tariff barriers and a less significant but still negative effect on tariffs, which is consistent with the fact that tariffs are constrained under WTO while governments have more discretion about non-tariff barriers.;The third chapter studies how increasing cross-border ownership can help bring the unilateral climate change policy -- the induced carbon price specifically -- closer to the globally efficient level. The model predicts that under perfect competition, the unilateral carbon price increases in the foreign ownership position -- the percentage of local productive factors owned by foreign investors. Under a cap-and-trade system with free allocation, the unilateral carbon price reaches the efficient level when there is full international portfolio diversification. The second part of the paper identifies the determinants of the endogenous choice between a cap-and-trade system and a carbon tax: political pressure, foreign ownership level, and trade exposure. The model finds that the government strictly prefers the cap-and-trade system when the political pressures from the local industry including foreign-owned firms is large enough compared to the foreign ownership position, and the government prefers a carbon tax otherwise. When the country is open to trade, a capand-trade system is preferred since the carbon tax will put the domestic firms at an even worse competitive position in the international market. A trading scheme with partial free allocation is in general suboptimal.