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Competition for FDI with vintage investment and agglomeration advantages

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  • Kai A. Konrad

    ()
    (Free University of Berlin and Social Science Research Centre Berlin (WZB))

  • Dan Kovenoch

    ()
    (University of Iowa)

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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Bibliographic Info

Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2009/18.

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Length: 31 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:ieb:wpaper:2009/10/doc2009-18

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Keywords: Dynamic tax competition; vintage capital; agglomeration; foreign direct investment; bidding for firms;

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References

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Citations

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Cited by:
  1. Elsayyad, May & Konrad, Kai A., 2012. "Fighting Multiple Tax Havens," Munich Reprints in Economics 13964, University of Munich, Department of Economics.
  2. Hyun-Ju Koh & Nadine Riedel, 2010. "Do governments tax agglomeration rents?," Working Papers 2010/21, Institut d'Economia de Barcelona (IEB).
  3. 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.
  4. Alexander Haupt & Tim Krieger, 2009. "The Role of Mobility in Tax and Subsidy Competition," CESifo Working Paper Series 2555, CESifo Group Munich.
  5. Nicolas Marceau & Steeve Mongrain, 2004. "Competition in Law Enforcement and Capital Allocation," Cahiers de recherche 0408, CIRPEE.
  6. Steeve Mongrain & John D. Wilson, 2011. "Tax competition with heterogeneous capital mobility," Working Papers 2011/25, Institut d'Economia de Barcelona (IEB).
  7. 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.
  8. Serena Fatica, 2010. "Taxation and the Quality of Institutions: Asymmetric Effects on FDI," Taxation Papers 21, Directorate General Taxation and Customs Union, European Commission.

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