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Competition for FDI with Vintage Investment and Agglomeration Advantages

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  • Konrad, Kai A
  • Kovenock, Dan

Abstract

Countries compete for new FDI investment, whereas stocks of FDI generate agglomeration benefits and are potentially subject to extortionary taxation. We study the interaction between these aspects in a simple vintage capital framework with discrete time and an infinite horizon, focussing on Markov perfect equilibrium. We show that the equilibrium taxation destabilizes agglomeration advantages. The agglomeration advantage is valuable, but is exploited in the short run. The tax revenue in the equilibrium is substantial, and higher on "old" FDI than on "new" FDI, even though countries are not allowed to use discriminatory taxation. If countries can provide fiscal incentives for attracting new firms, this stabilizes existing agglomeration advantages, but may erode the fiscal revenue in the equilibrium.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6740.

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Date of creation: Mar 2008
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Handle: RePEc:cpr:ceprdp:6740

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Keywords: Agglomeration; Bidding for firms; Dynamic tax competition; Foreign direct investment; Vintage capital;

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Citations

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Cited by:
  1. Hyun-Ju Koh & Nadine Riedel, 2010. "Do Governments Tax Agglomeration Rents?," Working Papers 1004, Oxford University Centre for Business Taxation.
  2. Giorgio Barba Navaretti & Anthony J. Venables, 2013. "Multinationals and industrial policy," Oxford Review of Economic Policy, Oxford University Press, vol. 29(2), pages 361-382, SUMMER.
  3. Nicolas Marceau & Steeve Mongrain, 2007. "Competition in Law Enforcement and Capital Allocation," Discussion Papers dp07-03, Department of Economics, Simon Fraser University.
  4. Serena Fatica, 2010. "Taxation and the Quality of Institutions: Asymmetric Effects on FDI," Taxation Papers 21, Directorate General Taxation and Customs Union, European Commission.
  5. Michael Keen & Kai A. Konrad, 2012. "International Tax Competition and Coordination," Working Papers international_tax_competi, Max Planck Institute for Tax Law and Public Finance.
  6. Elsayyad, May & Konrad, Kai A., 2012. "Fighting Multiple Tax Havens," Munich Reprints in Economics 13964, University of Munich, Department of Economics.
  7. Alexander Haupt & Tim Krieger, 2009. "The role of mobility in tax and subsidy competition," Working Papers CIE 21, University of Paderborn, CIE Center for International Economics.
  8. Marius Brülhart & Sam Bucovetsky & Kurt Schmidheiny, 2014. "Taxes in Cities," CESifo Working Paper Series 4951, CESifo Group Munich.
  9. Steeve Mongrain & John D. Wilson, 2011. "Tax competition with heterogeneous capital mobility," Working Papers 2011/25, Institut d'Economia de Barcelona (IEB).

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