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Subsidy Competition in Integrating Economies

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Author Info
Facundo Albornoz and Gregory Corcos

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Abstract

Regional integration affects location decisions of MNCs and therefore influences each member country’s provision of investment incentives, which in turn may trigger relocation. As a consequence, subsidy competition increases as integration proceeds. We analyze the welfare consequences of this phenomenon, modelling subsidization as a game between a MNC facing different location alternatives and governments that may deter or induce relocation by means of subsidies. We show that the combination of integration and subsidy competition may lead to an excess of subsidization. We also discuss how the interest of harmonizing subsidies, the net gains from integration crucially depend on technological differences, ownership and the absorption capacity of MNC profits by countries. Lastly, we find that the gain from supranational subsidy coordination increases with integration.

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Publisher Info
Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 05-14.

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Length: 41 pages
Date of creation: Oct 2005
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Handle: RePEc:bir:birmec:05-14

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Postal: Edgbaston, Birmingham, B15 2TT
Web page: http://www.economics.bham.ac.uk
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Related research
Keywords: Multinational Corporations; Regional Integration; FDI; Subsidy Competition; Location Choice;

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Find related papers by JEL classification:
F15 - International Economics - - Trade - - - Economic Integration
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
H2 - Public Economics - - Taxation, Subsidies, and Revenue

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Raff, Horst, 2004. "Preferential trade agreements and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 88(12), pages 2745-2763, December. [Downloadable!] (restricted)
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  2. Devereux, Michael P & Griffith, Rachel, 2003. "Evaluating Tax Policy for Location Decisions," International Tax and Public Finance, Springer, vol. 10(2), pages 107-26, March. [Downloadable!] (restricted)
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  3. 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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  4. Haaland, Jan I & Wooton, Ian, 1999. " International Competition for Multinational Investment," Scandinavian Journal of Economics, Blackwell Publishing, vol. 101(4), pages 631-49, December. [Downloadable!] (restricted)
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  5. Devereux, Michael P. & Pearson, Mark, 1995. "European tax harmonisation and production efficiency," European Economic Review, Elsevier, vol. 39(9), pages 1657-1681, December. [Downloadable!] (restricted)
  6. Ottaviano, Gianmarco Ireo Paolo & van Ypersele, Tanguy, 2002. "Market Access and Tax Competition," CEPR Discussion Papers 3638, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Devereux, Michael P. & Griffith, Rachel, 2003. "The Impact of Corporate Taxation on the Location of Capital: A Review," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 33(2), pages 275-292, September. [Downloadable!]
  8. Brian J. Aitken & Ann E. Harrison, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, vol. 89(3), pages 605-618, June. [Downloadable!] (restricted)
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  10. Richard E. Baldwin & Paul Krugman, 2002. "Agglomeration, Integration and Tax Harmonization," NBER Working Papers 9290, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete Over Corporate Tax Rates?," The Warwick Economics Research Paper Series (TWERPS) 642, University of Warwick, Department of Economics. [Downloadable!]
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  12. Kugler, Maurice, 2006. "Spillovers from foreign direct investment: Within or between industries?," Journal of Development Economics, Elsevier, vol. 80(2), pages 444-477, August. [Downloadable!] (restricted)
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  13. Motta, Massimo & Norman, George, 1996. "Does Economic Integration Cause Foreign Direct Investment?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 757-83, November.
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  14. 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)
  15. Janeba, Eckhard, 1998. "Tax competition in imperfectly competitive markets," Journal of International Economics, Elsevier, vol. 44(1), pages 135-153, February. [Downloadable!] (restricted)
  16. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-56, December. [Downloadable!] (restricted)
  17. Haufler, Andreas & Wooton, Ian, 1997. "Tax Competition for Foreign Direct Investment," CEPR Discussion Papers 1583, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  1. repec:bep:glecon:7:2007:1:5 is not listed on IDEAS
  2. Toshihiro Okubo, . "Trade Liberalisation and Agglomeration with Firm Heterogeneity----Forward and Backward Linkages," HEI Working Papers 16-2006, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
    Other versions:
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