When bargaining power matters: foreign direct investment and bilateral GDP disparities

Recent geopolitical and economic tensions have renewed attention to how bargaining asymmetries shape the distribution of gains from foreign direct investment (FDI). We examine whether international bargaining power conditions the relationship between FDI and bilateral GDP disparities. We develop a neoclassical growth model with a recursive investment game and derive a threshold beyond which FDI no longer narrows the relative income gap. Using declassified General Agreement on Tariffs and Trade (GATT) data, we construct bargaining-power indicators and find that FDI is associated with smaller bilateral GDP disparities, measured by the absolute log aggregate GDP gap, when the host country has relatively stronger bargaining power. This negative association is attenuated as host-country bargaining power weakens. These findings are robust across alternative cutoffs, continuous interactions, search-adjusted threshold tests, and instrumental-variable sensitivity analyses. The GDP-per-capita and 5-year forward-average growth-gap results are weaker, indicating that the bargaining channel is most visible in disparities in aggregate output.