Attracting multinationals: Additional hurdles under firm selection

We consider a country comprising monopolistic exporters, and a government seeking to boost their efficiency. With this goal, the government provides a multinational with incentives to relocate production in the country, which benefits exporters through productivity spillovers. Our setting highlights the additional difficulties to attract multinationals when the most efficient exporters benefit relatively more from spillovers. Specifically, this makes the policy more effective in enhancing aggregate productivity, by reallocating market share towards more productive firms. However, it simultaneously makes attracting multinationals harder, due to more pronounced increases in competition in the exporting market. Intuitively, the result underscores that multinationals could strategically avoid relocating production in a country if this potentially creates a pool of highly efficient competitors. Thus, those countries that have a subset of firms with outstanding capabilities and hence could potentially benefit more from this policy, are also the ones that could face additional hurdles to implement it.