Welfare implications of international financial integration

Focusing on technology spillover from foreign direct investment (FDI) inflows, this paper investigates the welfare implications of financial integration. Calibrations of a neoclassical growth model with international technology diffusion show that when technology catch-up due to FDI inflows is considered, the welfare gains from financial integration substantially increase, which contrasts with the small gains from additional, capital-accumulation effects of financial integration. The estimates suggest that by further enhancing financial integration, emerging Asian economies, such as the People's Republic of China (PRC) and the largest four Association of Southeast Asian Nations (ASEAN) countries, will experience substantial welfare gains.

► This paper investigates the welfare implications of financial integration by focusing on technology spillover from foreign direct investment (FDI) inflows. ► We estimate the actual degree of technology spillover. ► Using the estimates, we calibrate a neoclassical growth model with international technology diffusion to calculate the welfare gains of receiving FDI inflows. ► The calibration results show that when technology catch-up due to FDI inflows is considered, the welfare gains from financial integration substantially increase. ► In particular, by further enhancing financial integration, emerging Asian economies will experience substantial welfare gains.