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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
Phone: 01334 462420
Web page: http://www.st-and.ac.uk/%7Ewww_crieff/discpaps.html

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Related research
Keywords: Bargaining; subsidy; regional; competiton; FDI;

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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," cege – Center for European, Governance and Economic Development Research Discussion Papers 14, cege – 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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