Title: Foreign direct investment, business extortion and drug trafficking

Authors: Rafael S. Espinosa-Ramirez

Addresses: Department of Economics, University of Guadalajara, Periferico Norte 799, K302, 45100, Zapopan, Jalisco, Mexico

Abstract: We develop a theoretical model in which a country hosts foreign investment in the presence of a drug dealer, acting as leader, and a drug seller, acting as a follower. A policy addressed to eradicate drug trafficking encourages the business extortion activity, and increase the extortion cost of firms. When the drug is not consumed in the host country the best policy is not to fight against drug trafficking. When the drug is consumed in the host country, the optimal policy depends on the social marginal disutility of drug consumption concerning extortion paid by firms. In this case, when social marginal disutility is sufficiently larger than extortion payment, the government combats drug trafficking; otherwise, there is no policy at all.

Keywords: drug trafficking; foreign direct investment; FDI; business extortion; public policy; crime economy; drug consumption disutility; extortion payment; social marginal disutility; extortion cost.

DOI: 10.1504/IJEBR.2023.132645

International Journal of Economics and Business Research, 2023 Vol.26 No.2, pp.237 - 254

Received: 09 Feb 2021
Accepted: 10 Jul 2021
Published online: 07 Aug 2023 *

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