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On the Welfare Effects of Competition for Foreign Direct Investments

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Author Info
Fumagalli, Chiara

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Abstract

This paper studies the effects of subsidy competition for the location of a multinational enterprise (MNE). We assume that a (poorer) region enjoys larger gains from the positive externalities associated with the inward investment but that the MNE would find it more profitable to locate to the other (richer) region, subsidies being equal. In this setting, subsidy competition can improve aggregate welfare relative to a policy that bans grants because it gives the chance to the region that needs it more to attract the investment. The paper analyses under which conditions this is the case, assuming either that the multinational a priori decided to invest abroad or that exports are a feasible alternative to FDI. The welfare effects of subsidy competition can, accordingly, be extremely different.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2468.

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Date of creation: Jun 2000
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Handle: RePEc:cpr:ceprdp:2468

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Related research
Keywords: Business Location; Foreign Direct Investments; Tax Competition;

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Find related papers by JEL classification:
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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  1. Mario Mariniello, 2006. "State Aid to Attract FDI and the European Competition Policy: Should Variable Cost Aid Be Banned?," Economics Working Papers ECO2006/41, European University Institute. [Downloadable!]
  2. Haaland, Jan I. & Wooton, Ian, 2003. "Domestic Labour Markets and Foreign Direct Investment," CEPR Discussion Papers 3989, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Ferrett, Ben & Wooton, Ian, 2006. "Tax Competition and the International Distribution of Firm Ownership: An Invariance Result," CEPR Discussion Papers 5984, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Haufler, Andreas & Wooton, Ian, 2003. "Regional Tax Coordination and Foreign Direct Investment," Discussion Papers in Economics 61, University of Munich, Department of Economics. [Downloadable!]
    Other versions:
  5. Andreas Haufler & Ian Wooton, 2007. "Competition for Firms in an Oligopolistic Industry: Do Firms or Countries Have to Pay?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  6. Haufler, Andreas, 2006. "Die Besteuerung multinationaler Unternehmen," Discussion Papers in Economics 1153, University of Munich, Department of Economics. [Downloadable!]
  7. Davin Chor, 2007. "Subsidies for FDI: Implications from a Model with Heterogeneous Firms," Working Papers 04-2007, Singapore Management University, School of Economics. [Downloadable!]
    Other versions:
  8. O. Amerighi & G. De Feo, 2007. "Competition for FDI in the Presence of a Public Firm and the Effects of Privatization," Working Papers 605, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
  9. Lars Calmfors & Giancarlo Corsetti & Michael P. Devereux & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2008. "Chapter 4: Industrial policy," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 105-124, 02. [Downloadable!]
  10. Norbäck, Pehr-Johan & Persson, Lars & Vlachos, Jonas, 2006. "Cross-Border Acquisitions and Corporate Taxes: Efficiency and Tax Revenues," Working Paper Series 663, Research Institute of Industrial Economics. [Downloadable!]
  11. C. Dembour, 2008. "Competition for Business Location: A Survey," Journal of Industry, Competition and Trade, Springer, vol. 8(2), pages 89-111, June. [Downloadable!] (restricted)
  12. 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:
  13. Kjetil Bjorvatn & Carsten Eckel, 2003. "Winners and losers from an international investment agreement," CMI Working Papers WP 2003:11, CMI (Chr. Michelsen Institute), Bergen, Norway. [Downloadable!]
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