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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 infinite horizon, focussing on Markov perfect equilibrium in stationary strategies. We show that 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. Moreover, the agglomeration advantage is valuable, but is exploited in the short run and can be unstable over time. -- Länder konkurrieren um den aktuellen Strom ausländischer Direktinvestitionen. Der Bestand an Direktinvestitionen, die sich in einem Land angesammelt haben, hat Agglomerationsgewinne und seine Besteuerung erlaubt es, fiskalische Einnahmen zu erzielen. Die Interaktion zwischen diesen Aspekten wird in einem einfachen formalen Rahmen analysiert. Wesentliche Charakteristika der formalen Analyse sind diskrete Zeitperioden, ein unendlicher Zeithorizont und Investitionen, die zum Investitionszeitpunkt mobil sind, nach erfolgter Investition immobil sind und über mehrere Perioden abschreiben. Betrachtet werden Markov-perfekte Gleichgewichte. Die Möglichkeit der Besteuerung von ausländischen Direktinvestitionen kann im Gleichgewicht Agglomerationsvorteile solcher Investitionen destabilisieren. Die Agglomeration von Kapital ist wertvoll für das Land, in dem sie erfolgt ist. Die Vorteile werden aber kurzfristig ausgeschöpft. Das Gleichgewicht weist ein erhebliches Steueraufkommen auf. Dabei werden indirekt „alte“ steuerlich höher als „neue“ ausländische Direktinvestitionen belastet, obwohl den Ländern die diskriminierende Besteuerung untersagt wird. Zudem wird die Rolle von Subventionen und finanziellen Ansiedlungsanreizen behandelt. Die Möglichkeit, finanzielle Anreize für neue Investitionen zu geben, kann vorhandene Agglomerationsvorteile festigen, kann aber das Steueraufkommen im Gleichgewicht reduzieren.

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Paper provided by Social Science Research Center Berlin (WZB) in its series Discussion Papers, Research Unit: Market Processes and Governance with number SP II 2008-09.

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Date of creation: 2008
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Handle: RePEc:zbw:wzbmpg:spii200809

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

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Citations

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Cited by:
  1. May Elsayyad & Kai A. Konrad, 2010. "Fighting Multiple Tax Havens," CESifo Working Paper Series 3195, CESifo Group Munich.
  2. Marceau, Nicolas & Mongrain, Steeve, 2011. "Competition in law enforcement and capital allocation," Journal of Urban Economics, Elsevier, vol. 69(1), pages 136-147, January.
  3. Koh, Hyun-Ju & Riedel, Nadine & Böhm, Tobias, 2013. "Do governments tax agglomeration rents?," Journal of Urban Economics, Elsevier, vol. 75(C), pages 92-106.
  4. Steeve Mongrain & John D. Wilson, 2011. "Tax competition with heterogeneous capital mobility," Working Papers 2011/25, Institut d'Economia de Barcelona (IEB).
  5. Alexander Haupt & Tim Krieger, 2009. "The role of mobility in tax and subsidy competition," Working Papers 2009/37, Institut d'Economia de Barcelona (IEB).
  6. Michael Keen & Kai A. Konrad, 2012. "International Tax Competition and Coordination," Working Papers, Max Planck Institute for Tax Law and Public Finance international_tax_competi, Max Planck Institute for Tax Law and Public Finance.
  7. Marius Brülhart & Sam Bucovetsky & Kurt Schmidheiny, 2014. "Taxes in Cities," CESifo Working Paper Series 4951, CESifo Group Munich.
  8. Serena Fatica, 2010. "Taxation and the Quality of Institutions: Asymmetric Effects on FDI," Taxation Papers, Directorate General Taxation and Customs Union, European Commission 21, Directorate General Taxation and Customs Union, European Commission.
  9. 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.

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