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Optimal policy for FDI incentives: An auction theory approach

  • Israel Luski
  • Mosi Rosenboim
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    A multinational corporation’s (MNC) entry into a host country brings benefits to the economy of that country, some direct (such as increasing production and employment) and some indirect (such as productivity spin-off). Governments that view MNCs as engines for growth and regional development have begun to encourage the flow of foreign investment into their country in hopes of increased local employment, market production and export capacity. MNCs consider first the maximization of profit when selecting a site to establish their subsidiaries. An MNC examines possible investment sites and indicates those that are best fitted for the investment. The countries that remain at this stage are similar in terms of their economic characteristics, and they compete with each other for receiving the foreign investment. In this paper we use tools from auction theory to analyze the competition between host countries and MNCs and investigate the existence of Nash equilibrium strategies. The characteristics of this equilibrium are considered and assessed. We developed a general model for examining the incentive competition between two countries and then apply it for several subgroups according to the number of MNCs and the availability of information. It turns out that the characteristics of the equilibrium depend on the number of MNCs as well as on the structure of their contribution to the host country economy.

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    File URL: http://www.ersj.eu/repec/ers/papers/09_3_p5.pdf
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    Article provided by European Research Studies Journal in its journal European Research Studies Journal.

    Volume (Year): XII (2009)
    Issue (Month): 3 ()
    Pages: 61-76

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    Handle: RePEc:ers:journl:v:xii:y:2009:i:3:p:61-76
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    1. Sophia Dimelis & Helen Louri, 2002. "Foreign ownership and production efficiency: a quantile regression analysis," Oxford Economic Papers, Oxford University Press, vol. 54(3), pages 449-469, July.
    2. Eleftherios Thalassinos & Theodoros Kyriazidis & John Thalassinos, 2006. "The Greek Capital Market: Caught in Between Poor Corporate Governance and Market Inefficiency," European Research Studies Journal, European Research Studies Journal, vol. 0(1-2), pages 3-24.
    3. Eleftherios Thalassinos & Pantelis E. Thalassinos, 2006. "Stock Markets' Integration Analysis," European Research Studies Journal, European Research Studies Journal, vol. 0(3-4), pages 3-14.
    4. Bjorvatn, Kjetil & Eckel, Carsten, 2006. "Policy competition for foreign direct investment between asymmetric countries," European Economic Review, Elsevier, vol. 50(7), pages 1891-1907, October.
    5. Eleftherios THALASSINOS, 2008. "Trends and Developments in the European Financial Sector," European Financial and Accounting Journal, University of Economics, Prague, vol. 2008(3), pages 44-61.
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