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Subsidy Competition and the Mode of FDI: Acquisition vs Greenfield

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Author Info
Facundo Albornoz, Gregory Corcos and Toby Kendall

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Abstract

We model subsidy competition for a foreign MNC’s investment in a two-country PTA. Taking into account acquisitions as an alternative investment mode weakens the case for subsidising greenfield investment, even for a single government. Considering competition between member states, it widens the scope of harmful subsidy competition. While our predictions are sensitive to the acquisition price, we predict that in many cases a ban on subsidies may increase welfare. In addition, we show how trade integration and increased competition for targets raise the prospects for social waste. Finally, if FDI entails significant positive spillovers to the host country, fiercer competition for investment and greater welfare losses should be expected.

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Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 05-15.

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Length: 43 pages
Date of creation: Oct 2005
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Handle: RePEc:bir:birmec:05-15

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  8. César Calderón & Norman Loayza & Luis Servén, 2002. "Greenfield Fdi vs. Mergers and Acquisitions: Does the Distinction Matter?," Working Papers Central Bank of Chile 173, Central Bank of Chile. [Downloadable!]
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  16. Wilfred J. Ethier, 1998. "Regionalism in a Multilateral World," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1214-1245, December. [Downloadable!] (restricted)
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  18. Norman, George & Motta, Massimo, 1993. "Eastern European Economic Integration and Foreign Direct Investment," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 2(4), pages 483-507, Winter.
  19. 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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