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Inter-jurisdiction Subsidy Competition for a New Production Plant: What is the Central Government Optimal Policy?

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Author Info
Osiris J.Parcero

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Abstract

This paper models inter-jurisdiction competition for foreign direct investment and optimal government policy intervention to protect the national interest. The inter-jurisdiction competition for a multinational has the potential of favouring the multinational and of becoming detrimental for the host country. The central government wants to limit such competition but it cannot tax-discriminate between different types of multinationals. We find that the central government would use tax policy to create asymmetries even when the underlying structure is symmetrical. This offers a novel explanation for the creation of ‘Special Economic Zones’ in many countries, which are well known to be aimed at the attraction of foreign direct investment.

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Publisher Info
Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 0601.

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Date of creation: May 2006
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Handle: RePEc:san:crieff:0601

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Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
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Web page: http://www.st-and.ac.uk/%7Ewww_crieff/discpaps.html

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Related research
Keywords: Bargaining subsidy regional competiton FDI

Find related papers by JEL classification:
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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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.:
  1. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September. [Downloadable!] (restricted)
  2. Andreas Haufler & Ian Wooton, 2001. "Regional Tax Coordination and Foreign Direct Investment," Center for European, Governance and Economic Development Research (cege) Discussion Papers 14, Center for European, Governance and Economic Development Research, University of Goettingen (Germany).. [Downloadable!]
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  3. Litwack, John M. & Qian, Yingyi, 1998. "Balanced or Unbalanced Development: Special Economic Zones as Catalysts for Transition," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 117-141, March. [Downloadable!] (restricted)
  4. Bolton, Patrick & Whinston, Michael D, 1993. "Incomplete Contracts, Vertical Integration, and Supply Assurance," Review of Economic Studies, Blackwell Publishing, vol. 60(1), pages 121-48, January. [Downloadable!] (restricted)
  5. Ian King & R. Preston McAfee & Linda Welling, 1993. "Industrial Blackmail: Dynamic Tax Competition and Public Investment," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 590-608, August. [Downloadable!] (restricted)
  6. Barros, Pedro P & Cabral, Luis, 2000. "Competing for Foreign Direct Investment," Review of International Economics, Blackwell Publishing, vol. 8(2), pages 360-71, May. [Downloadable!] (restricted)
  7. Doyle, Christopher & van Wijnbergen, Sweder, 1984. "Taxation of Foreign Multinationals: A Sequential Bargaining Approach to Tax Holidays," CEPR Discussion Papers 25, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. King, Ian & Welling, Linda, 1992. "Commitment, Efficiency and Footloose Firms," Economica, London School of Economics and Political Science, vol. 59(233), pages 63-73, February. [Downloadable!] (restricted)
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