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Competition for FDI with vintage investment and agglomeration advantages

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  • Konrad, Kai A.
  • Kovenock, Dan

Abstract

Countries compete for new FDI investment, whereas stocks of FDI generate agglomeration benefits and are potentially subject to extortionary taxation. We study the interaction between these aspects in a simple vintage capital framework with discrete time and an infinite horizon, focussing on Markov perfect equilibrium. We show that the equilibrium taxation destabilizes agglomeration advantages. The agglomeration advantage is valuable, but is exploited in the short run. The tax revenue in the equilibrium is substantial, and higher on "old" FDI than on "new" FDI, even though countries are not allowed to use discriminatory taxation. If countries can provide fiscal incentives for attracting new firms, this stabilizes existing agglomeration advantages, but may erode the fiscal revenue in the equilibrium.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 79 (2009)
Issue (Month): 2 (November)
Pages: 230-237

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Handle: RePEc:eee:inecon:v:79:y:2009:i:2:p:230-237

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Dynamic tax competition Vintage capital Agglomeration Foreign direct investment Bidding for firms;

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Cited by:
  1. Giorgio Barba Navaretti & Anthony J. Venables, 2013. "Multinationals and Industrial Policy," Development Working Papers 352, Centro Studi Luca d\'Agliano, University of Milano, revised 24 Apr 2013.
  2. Hyun-Ju Koh & Nadine Riedel, 2010. "Do Governments Tax Agglomeration Rents?," Working Papers 1004, Oxford University Centre for Business Taxation.
  3. Elsayyad, May & Konrad, Kai A., 2012. "Fighting multiple tax havens," Journal of International Economics, Elsevier, vol. 86(2), pages 295-305.
  4. Haupt, Alexander & Krieger, Tim, 2013. "The role of mobility in tax and subsidy competition," Discussion Paper Series 2013-02, University of Freiburg, Wilfried Guth Endowed Chair for Constitutional Political Economy and Competition Policy.
  5. Steeve Mongrain & John D. Wilson, 2011. "Tax competition with heterogeneous capital mobility," Working Papers 2011/25, Institut d'Economia de Barcelona (IEB).
  6. Serena Fatica, 2010. "Taxation and the Quality of Institutions: Asymmetric Effects on FDI," Taxation Papers 21, Directorate General Taxation and Customs Union, European Commission.
  7. Nicolas Marceau & Steeve Mongrain, 2004. "Competition in Law Enforcement and Capital Allocation," Cahiers de recherche 0408, CIRPEE.
  8. Michael Keen & Kai A. Konrad, 2012. "International Tax Competition and Coordination," Working Papers international_tax_competi, Max Planck Institute for Tax Law and Public Finance.

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