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This paper adds to the debate on the relationship between foreign direct investment (FDI) and economic growth which suggest that the link between FDI and economic growth is rather the consequence o...

Foreign technological advance unambiguously reduces home welfare in a popular variant of the Melitz (Econometrica 71(6):1695–1725, 2003) model that assumes the presence of a costlessly traded homogeneous (outside) good (Demidova in Int Econ Rev 49(4):1437–1462, 2008). The present paper shows that this result is sensitive to the presence of the outside good and is, in fact, reversed in its absence: foreign technological advance always improves home welfare in the Melitz model without the outside good. Improvement in home welfare occurs via changes in the numbers and prices of domestic and imported varieties. For quantitative analysis of welfare effects, we calibrate an international trade model for the United States and its major trading partners. US is found to gain less from foreign technological improvements than its trading partners from US improvements. In either case, the magnitude of gains is modest.