AMERIGHI, Oscar (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)) DE FEO, Giuseppe (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
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In this paper, we provide an explanation of why privatization may attract foreign investors interested in entering a regional market. Privatization turns the formerly-public firm into a less aggressive competitor since profit- maximizing output is lower than the welfare-maximizing one. The drawback is that social welfare generally decreases. We also investigate tax/subsidy competition for FDI before and after privatization. We show that policy competition is irrelevant in the presence of a public firm serving just its domestic market. By contrast, following privatization, it endows the big country with an instrument which can be used either to reduce the negative impact on welfare of an FDI-attracting privatization or to protect the domestic industry from foreign competitors.
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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number
2008002.
Find related papers by JEL classification: F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Boundaries of Public and Private Enterprise; Privatization; Contracting Out
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