Incentives to create jobs: Regional subsidies, national trade policy and foreign direct investment
A national authority wishes to attract foreign direct investment (FDI) to create local jobs. We analyse the optimal national trade policy when local authorities might offer subsidies to convince a multi-national enterprise (MNE) to invest in their jurisdiction. With centralised decision-making or with allocation of investment to particular localities, the central authority's optimal policy is to use a high tariff to avoid payment of any subsidy to the MNE. Despite this, some socially undesirable (but locally desirable) FDI cannot be avoided. If local authorities compete to offer subsidies to attract local investment, then the central government's optimal policy is to try to discourage FDI by choosing a low tariff. Despite this, some socially undesirable – and even locally undesirable – FDI prevails. We conduct our analysis both assuming an upper bound on tariffs, as would be consistent with trade liberalisation, and allowing tariffs to vary freely. The effect of increasing trade liberalisation depends heavily on the system of granting local subsidies: if the system is centralised, trade liberalisation decreases the range of parameters for which FDI occurs; if the system is decentralised and competitive, it increases this range.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
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.:
- Raff, Horst, 2004.
"Preferential trade agreements and tax competition for foreign direct investment,"
Journal of Public Economics,
Elsevier, vol. 88(12), pages 2745-2763, December.
- Horst Raff, 2002. "Preferential Trade Agreements and Tax Competition for Foreign Direct Investment," CESifo Working Paper Series 763, CESifo Group Munich.
- Blanchard, Emily J., 2010.
"Reevaluating the role of trade agreements: Does investment globalization make the WTO obsolete?,"
Journal of International Economics,
Elsevier, vol. 82(1), pages 63-72, September.
- Emily Blanchard, 2006. "Reevaluating the Role of Trade Agreements: Does Investment Globalization Make the WTO Obsolete?," CESifo Working Paper Series 1735, CESifo Group Munich.
- Ronald B. Davies, 2000.
"State Tax Competition for Foreign Direct Investment: A Winnable War?,"
University of Oregon Economics Department Working Papers
2000-4, University of Oregon Economics Department, revised 01 Jul 2002.
- Davies, Ronald B., 2005. "State tax competition for foreign direct investment: a winnable war?," Journal of International Economics, Elsevier, vol. 67(2), pages 498-512, December.
- Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004.
"Export Versus FDI with Heterogeneous Firms,"
American Economic Review,
American Economic Association, vol. 94(1), pages 300-316, March.
- Matsuyama, Kiminori, 1990.
"Perfect Equilibria in a Trade Liberalization Game,"
American Economic Review,
American Economic Association, vol. 80(3), pages 480-92, June.
- Albornoz Facundo & Corcos Gregory, 2007. "Regional Integration, Subsidy Competition and the Relocation Choice of MNCs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-27, January.
- Antonio Estache & Liam Wren-Lewis, 2009.
"Toward a Theory of Regulation for Developing Countries: Following Jean-Jacques Laffont's Lead,"
Journal of Economic Literature,
American Economic Association, vol. 47(3), pages 729-70, September.
- Antonio Estache & L. Wren-Lewis, 2009. "Towards a Theory of Regulation for Developing Countries: Following Jean-Jacques Laffont's Lead," ULB Institutional Repository 2013/43903, ULB -- Universite Libre de Bruxelles.
- Ronald B. Davies, 2003. "The OECD Model Tax Treaty: Tax Competition And Two-Way Capital Flows," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 725-753, 05.
- Cole, Matthew T. & Davies, Ronald B., 2011. "Strategic tariffs, tariff jumping, and heterogeneous firms," European Economic Review, Elsevier, vol. 55(4), pages 480-496, May.
- Matschke, Xenia & Blanchard, Emily, 2013.
"U.S. Multinationals and Preferential Market Access,"
Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order
79751, Verein für Socialpolitik / German Economic Association.
- Emily Blanchard & Xenia Matschke, 2012. "U.S. Multinationals and Preferential Market Access," CESifo Working Paper Series 3847, CESifo Group Munich.
- Emily Blanchard & Xenia Matschke, 2010. "U.S. Multinationals and Preferential Market Access," Research Papers in Economics 2010-08, University of Trier, Department of Economics.
- Jonathan Jones & Colin Wren, 2008. "FDI Location Across British Regions and Inward Investment Policy," SERC Discussion Papers 0013, Spatial Economics Research Centre, LSE.
- Pierre Regibeau & Katharine Rockett & Laurel Adams, 2012. "Incentives to Create Jobs:� Regional Subsidies, National Trade Policy and Foreign Direct Investment," Economics Discussion Papers 710, University of Essex, Department of Economics.
- Barros, Pedro P & Cabral, Luis, 2000. "Competing for Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 360-71, May.
- Janeba, Eckhard, 1998.
"Tax competition in imperfectly competitive markets,"
Journal of International Economics,
Elsevier, vol. 44(1), pages 135-153, February.
- Eckard Janeba, . "Tax Competition in Imperfectly Competitive Markets," Discussion Paper Serie A 513, University of Bonn, Germany.
- Pierre-Louis Vézina, 2014.
"Race-to-the-bottom Tariff Cutting,"
Review of International Economics,
Wiley Blackwell, vol. 22(3), pages 444-458, 08.
- Montek S. Ahluwalia, 2002. "Economic Reforms in India Since 1991: Has Gradualism Worked?," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 67-88, Summer.
- Brander, James A. & Spencer, Barbara J., 1987. "Foreign direct investment with unemployment and endogenous taxes and tariffs," Journal of International Economics, Elsevier, vol. 22(3-4), pages 257-279, May.
- Pranab Bardhan & Dilip Mookherjee, 2006. "Decentralisation and Accountability in Infrastructure Delivery in Developing Countries," Economic Journal, Royal Economic Society, vol. 116(508), pages 101-127, 01.
- John Wilson & Eckhard Janeba, 2003.
"Decentralization and International Tax Competition,"
CESifo Working Paper Series
854, CESifo Group Munich.
- Wilson, John Douglas & Janeba, Eckhard, 2005. "Decentralization and international tax competition," Journal of Public Economics, Elsevier, vol. 89(7), pages 1211-1229, July.
- repec:ttp:itpwps:0601 is not listed on IDEAS
- Blanchard Emily J, 2007. "Foreign Direct Investment, Endogenous Tariffs, and Preferential Trade Agreements," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-52, November.
- Sebastian G. Kessing & Kai A. Konrad & Christos Kotsogiannis, 2007. "Foreign direct investment and the dark side of decentralization," Economic Policy, CEPR;CES;MSH, vol. 22, pages 5-70, 01.
- Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:111:y:2014:i:c:p:102-119. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.