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Privatization and policy competition for FDI

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  • AMERIGHI, Oscar

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • DE FEO, Giuseppe

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

Abstract

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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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2008002.

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Date of creation: 01 Jan 2008
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Handle: RePEc:cor:louvco:2008002

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Keywords: foreign direct investment; tax competition; public firm; privatization.;

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Cited by:
  1. Amerighi, Oscar & De Feo, Giuseppe, 2010. "On the FDI-attracting property of privatizatio," SIRE Discussion Papers 2010-34, Scottish Institute for Research in Economics (SIRE).

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