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Inter-jurisdiction subsidy competition for a new production plant: What is the central government optimal policy?

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Parcero, O.J.

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Abstract

This paper models inter-jurisdiction competition for foreign direct investment and optimal government policy intervention to protect the national interest. The inter-jurisdiction competition for a multinational has the potential of favouring the multinational and of becoming detrimental for the host country. The central government wants to limit such competition but it cannot tax-discriminate between different types of multinationals. We find that the central government would use tax policy to create asymmetries even when the underlying structure is symmetrical. This offers a novel explanation for the creation of [`]Special Economic Zones' in many countries, which are well known to be aimed at the attraction of foreign direct investment.

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File URL: http://www.sciencedirect.com/science/article/B6V89-4PCPFBW-1/2/dc55d200a03d580dfd4f241da458e6c6
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Publisher Info
Article provided by Elsevier in its journal Regional Science and Urban Economics.

Volume (Year): 37 (2007)
Issue (Month): 6 (November)
Pages: 688-702
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Handle: RePEc:eee:regeco:v:37:y:2007:i:6:p:688-702

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Related research
Keywords: Bargaining Subsidy Regional Competition Foreign direct investment (FDI);

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  1. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September. [Downloadable!] (restricted)
  2. Andreas Haufler & Ian Wooton, 2001. "Regional Tax Coordination and Foreign Direct Investment," cege – Center for European, Governance and Economic Development Research Discussion Papers 14, cege – Center for European, Governance and Economic Development Research, University of Goettingen (Germany).. [Downloadable!]
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  3. Litwack, John M. & Qian, Yingyi, 1998. "Balanced or Unbalanced Development: Special Economic Zones as Catalysts for Transition," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 117-141, March. [Downloadable!] (restricted)
  4. Bolton, Patrick & Whinston, Michael D, 1993. "Incomplete Contracts, Vertical Integration, and Supply Assurance," Review of Economic Studies, Blackwell Publishing, vol. 60(1), pages 121-48, January. [Downloadable!] (restricted)
  5. Ian King & R. Preston McAfee & Linda Welling, 1993. "Industrial Blackmail: Dynamic Tax Competition and Public Investment," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 590-608, August. [Downloadable!] (restricted)
  6. Barros, Pedro P & Cabral, Luis, 2000. "Competing for Foreign Direct Investment," Review of International Economics, Blackwell Publishing, vol. 8(2), pages 360-71, May. [Downloadable!] (restricted)
  7. Doyle, Christopher & van Wijnbergen, Sweder, 1984. "Taxation of Foreign Multinationals: A Sequential Bargaining Approach to Tax Holidays," CEPR Discussion Papers 25, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. King, Ian & Welling, Linda, 1992. "Commitment, Efficiency and Footloose Firms," Economica, London School of Economics and Political Science, vol. 59(233), pages 63-73, February. [Downloadable!] (restricted)
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