Advanced Search
MyIDEAS: Login

Competition for FDI with vintage investment and agglomeration advantages

Contents:

Author Info

  • Kai A. Konrad
  • Dan Kovenock

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.krannert.purdue.edu/programs/phd/Working-paper-series/Year-2008/1210.pdf
Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Krannert PHD)
Download Restriction: no

Bibliographic Info

Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1210.

as in new window
Length: 24 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:pur:prukra:1210

Contact details of provider:
Postal: Krannert Building, West Lafayette, IN 47907
Web page: http://www.krannert.purdue.edu/programs/phd
More information through EDIRC

Related research

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

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Deneckere, Raymond J & Kovenock, Dan & Lee, Robert, 1992. "A Model of Price Leadership Based on Consumer Loyalty," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 147-56, June.
  2. Yongmin Chen & Robert W. Rosenthal, 1992. "Dynamic Duopoly with Slowly Changing Customer Loyalties," Papers 0037, Boston University - Industry Studies Programme.
  3. Joseph Farrell & Paul Klemperer, 2006. "Co-ordination and Lock-in: Competition with Switching Costs and Network Effects," Economics Papers 2006-W07, Economics Group, Nuffield College, University of Oxford.
  4. Konrad, K.A. & Lommerud, K.E., 2001. "Foreign Direct Investment, Intra-firm Trade and Ownership Structure," Norway; Department of Economics, University of Bergen 219, Department of Economics, University of Bergen.
  5. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR & CES & MSH, vol. 17(35), pages 449-495, October.
  6. Janeba, Eckhard & Peters, Wolfgang, 1999. "Tax Evasion, Tax Competition and the Gains from Nondiscrimination: The Case of Interest Taxation in Europe," Economic Journal, Royal Economic Society, vol. 109(452), pages 93-101, January.
  7. Hatfield, John, 2006. "Federalism, Taxation, and Economic Growth," Research Papers 1929, Stanford University, Graduate School of Business.
  8. Nicolas Marceau & Steeve Mongrain & John D. Wilson, 2007. "Why Do Most Countries Set High Tax Rates on Capital?," Cahiers de recherche 0711, CIRPEE.
  9. Hans Jarle Kind & Helene Midelfart & Guttorm Schjelderup, 2000. "Competing for Capital in a "Lumpy" World," CESifo Working Paper Series 252, CESifo Group Munich.
  10. Baye, Michael R. & Kovenock, Dan & de Vries, Casper G., 1992. "It takes two to tango: Equilibria in a model of sales," Games and Economic Behavior, Elsevier, vol. 4(4), pages 493-510, October.
  11. Kehoe, Patrick J, 1989. "Policy Cooperation among Benevolent Governments May Be Undesirable," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 289-96, April.
  12. Duncan, Roderick, 2006. "Price or politics? An investigation of the causes of expropriation," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(1), March.
  13. Richard E. Baldwin & Paul Krugman, 2002. "Agglomeration, Integration and Tax Harmonization," NBER Working Papers 9290, National Bureau of Economic Research, Inc.
  14. Thomas, Jonathan & Worrall, Tim, 1994. "Foreign Direct Investment and the Risk of Expropriation," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 81-108, January.
  15. Thomas J. Holmes, 1996. "How industries migrate when agglomeration economies are important," Staff Report 219, Federal Reserve Bank of Minneapolis.
  16. Andersson, Fredrik & Konrad, Kai A., 2003. "Human capital investment and globalization in extortionary states," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1539-1555, August.
  17. Roderick Duncan, 2006. "Price or politics? An investigation of the causes of expropriation ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(1), pages 85-101, 03.
  18. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
  19. Wildasin, David E., 2003. "Fiscal competition in space and time," Journal of Public Economics, Elsevier, vol. 87(11), pages 2571-2588, October.
  20. Haupt, Alexander & Peters, Wolfgang, 2005. "Restricting preferential tax regimes to avoid harmful tax competition," Regional Science and Urban Economics, Elsevier, vol. 35(5), pages 493-507, September.
  21. Schnitzer, Monika, 1998. "Expropriation and Control Rights: A Dynamic Model of Foreign Direct Investment," CEPR Discussion Papers 1891, C.E.P.R. Discussion Papers.
  22. Guy Dumais & Glenn Ellison & Edward L. Glaeser, 2002. "Geographic Concentration As A Dynamic Process," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 193-204, May.
  23. Strange, William & Hejazi, Walid & Tang, Jianmin, 2006. "The uncertain city: Competitive instability, skills, innovation and the strategy of agglomeration," Journal of Urban Economics, Elsevier, vol. 59(3), pages 331-351, May.
  24. Timothy Besley & Paul Seabright, 1999. "The effects and policy implications of state aids to industry: an economic analysis," Economic Policy, CEPR & CES & MSH, vol. 14(28), pages 13-53, 04.
  25. Eckhard Janeba, 2000. "Tax Competition When Governments Lack Commitment: Excess Capacity as a Countervailing Threat," American Economic Review, American Economic Association, vol. 90(5), pages 1508-1519, December.
  26. Wang, Xuejun, 2004. "Tax evasion, tax competition and gains from nondiscrimination with equilibrium mixed strategies," Economics Letters, Elsevier, vol. 83(3), pages 377-381, June.
  27. Dietmar Harhoff, 2008. "Innovation, Entrepreneurship und Demographie," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 9(3), pages 46-72, 08.
  28. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  29. Devereux, Michael P. & Griffith, Rachel & Simpson, Helen, 2007. "Firm location decisions, regional grants and agglomeration externalities," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 413-435, April.
  30. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-49, October.
  31. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  32. Johann Peter Murmann & Ernst Homburg, 2001. "Comparing evolutionary dynamics across different national settings: the case of the synthetic dye industry, 1857–1914," Journal of Evolutionary Economics, Springer, vol. 11(2), pages 177-205, February.
  33. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-56, December.
  34. Sebastian Kessing & Kai Konrad & Christos Kotsogiannis, 2009. "Federalism, weak institutions and the competition for foreign direct investment," International Tax and Public Finance, Springer, vol. 16(1), pages 105-123, February.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Nicolas Marceau & Steeve Mongrain, 2007. "Competition in Law Enforcement and Capital Allocation," Discussion Papers dp07-03, Department of Economics, Simon Fraser University.
  2. Elsayyad, May & Konrad, Kai A., 2012. "Fighting multiple tax havens," Journal of International Economics, Elsevier, vol. 86(2), pages 295-305.
  3. Serena Fatica, 2010. "Taxation and the Quality of Institutions: Asymmetric Effects on FDI," Taxation Papers 21, Directorate General Taxation and Customs Union, European Commission.
  4. Alexander Haupt & Tim Krieger, 2009. "The role of mobility in tax and subsidy competition," Working Papers 2009/37, Institut d'Economia de Barcelona (IEB).
  5. Hyun-Ju Koh & Nadine Riedel, 2010. "Do Governments Tax Agglomeration Rents?," CESifo Working Paper Series 2976, CESifo Group Munich.
  6. Giorgio Barba Navaretti & Anthony J. Venables, 2013. "Multinationals and Industrial Policy," Development Working Papers 352, Centro Studi Luca d\'Agliano, University of Milano, revised 24 Apr 2013.
  7. 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.
  8. Steeve Mongrain & John D. Wilson, 2011. "Tax competition with heterogeneous capital mobility," Working Papers 2011/25, Institut d'Economia de Barcelona (IEB).

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:pur:prukra:1210. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Krannert PHD).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.