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Fiscal competition for foreign direct investment with knowledge spillovers and trade costs

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  • Ben Ferrett
  • Daniel Gravino

Abstract

We develop a model of fiscal competition for foreign direct investment and show that the decision of multinational firms to locate in the proximity of indigenous firms—which can be thought of as agglomeration—may be the result of the provision of government incentives that aim to capitalise on the potential for knowledge spillovers to indigenous industry. Somewhat different but complementary to existing literature, we also show that fiscal competition may increase the welfare of both winning and losing countries in the auction for the multinational firm when it leads to the relocation of multinationals away from countries that do not have the potential to benefit from knowledge spillovers to countries that do. As trade costs fall and the potential for knowledge spillovers increases, both outcomes become more likely in equilibrium.

Suggested Citation

  • Ben Ferrett & Daniel Gravino, 2021. "Fiscal competition for foreign direct investment with knowledge spillovers and trade costs," The World Economy, Wiley Blackwell, vol. 44(10), pages 2821-2837, October.
    • Handle: RePEc:bla:worlde:v:44:y:2021:i:10:p:2821-2837
    DOI: 10.1111/twec.13073
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    Cited by:

    1. Alvaro Cuervo-Cazurra & C. Annique Un, 2023. "Beauty in the Eyes of the Beholders: How Government- and Consumer-Based Country-of-Origin Advantages and Disadvantages Drive Host Country Investment Dynamics," Management International Review, Springer, vol. 63(2), pages 285-312, April.
    2. OKOSHI Hirofumi & Kyikyi Thar, 2023. "Backfired Deregulation of Foreign Ownership Restrictions under Fiscal Competition for Foreign Direct Investment," Discussion papers 23059, Research Institute of Economy, Trade and Industry (RIETI).

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