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Welfare effects of competition for FDI between technologically asymmetric countries with varying trade costs

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  • Hwangbo, Kyoung
  • Kim, Young-Han

Abstract

Given the traditional argument that host countries' excessive competition for FDI (foreign direct investment) deteriorates the host countries' welfare, this paper examines the impact of policy competition for FDI on social welfare considering varying trade costs. Based on a model where two technologically asymmetric countries compete for FDI, we determine an equilibrium where a multinational firm relocates to a less efficient country. Moreover, we demonstrate that the policy competition for FDI between less integrated economies might improve social welfare when the multinational firm relocates to a country with a lower technology and a less competitive market. Nonetheless, we show that the traditional argument can be true when the policy competition for FDI between highly integrated economies deteriorates host countries' welfare, as supported by the empirical evidences of moderated competition for FDI within EU member countries.

Suggested Citation

  • Hwangbo, Kyoung & Kim, Young-Han, 2013. "Welfare effects of competition for FDI between technologically asymmetric countries with varying trade costs," Economic Modelling, Elsevier, vol. 35(C), pages 493-501.
    • Handle: RePEc:eee:ecmode:v:35:y:2013:i:c:p:493-501
    DOI: 10.1016/j.econmod.2013.07.032
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    References listed on IDEAS

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    Cited by:

    1. Kim, Sang-Kee, 2020. "Intellectual property right infringement, state involvement in industrial espionage, and North-South trade," Economic Modelling, Elsevier, vol. 91(C), pages 110-116.

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    More about this item

    Keywords

    Policy competition for FDI; Location strategy of multinational firms; Technology asymmetry; Cross-border trade costs; Economic integration;
    All these keywords.

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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