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The supply of foreign direct investment incentives: subsidy competition in an oligopolistic framework

  • Tomáš Havránek

This paper examines the microeconomic motivation of governments to provide tax incentives for foreign direct investment. Author applies the classical models of oligopoly to subsidy competition, endogenousing investment incentives, but leaving tax rates exogenous. According to the conventional wisdom, subsidy competition leads to overprovision of incen-tives. This paper suggests that, in the oligopolistic framework, supranational coordination can either decrease or increase the supply of subsidies. Further, in the setting of subsidy regulation, the host country's corporate income tax rate has an ambiguous effect on the provision of incentives.

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Article provided by University of Economics, Prague in its journal Prague Economic Papers.

Volume (Year): 2009 (2009)
Issue (Month): 2 ()
Pages: 131-155

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Handle: RePEc:prg:jnlpep:v:2009:y:2009:i:2:id:346:p:131-155
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  1. Timothy Besley & Paul Seabright, 1999. "The effects and policy implications of state aids to industry: an economic analysis," Economic Policy, CEPR;CES;MSH, vol. 14(28), pages 13-53, 04.
  2. Haufler, Andreas & Wooton, Ian, 2006. "The effects of regional tax and subsidy coordination on foreign direct investment," Munich Reprints in Economics 19926, University of Munich, Department of Economics.
  3. Haaland, Jan I & Wooton, Ian, 1999. " International Competition for Multinational Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(4), pages 631-49, December.
  4. Barros, Pedro P & Cabral, Luis, 2000. "Competing for Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 360-71, May.
  5. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
  6. Magnus Blomstrom & Ari Kokko, 2003. "The Economics of Foreign Direct Investment Incentives," NBER Working Papers 9489, National Bureau of Economic Research, Inc.
  7. Gorg, Holger & Strobl, Eric, 2001. "Multinational Companies and Productivity Spillovers: A Meta-analysis," Economic Journal, Royal Economic Society, vol. 111(475), pages F723-39, November.
  8. Andrew Charlton, 2003. "Incentive Bidding for Mobile Investment: Economic Consequences and Potential Responses," OECD Development Centre Working Papers 203, OECD Publishing.
  9. Tomáš Havránek & Zuzana Iršová, 2008. "Intra-Industry Spillovers from Inward FDI: A Meta-Regression Analysis," Working Papers IES 2008/08, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2008.
  10. Rossitza B. Wooster & David S. Diebel, 2010. "Productivity Spillovers from Foreign Direct Investment in Developing Countries: A Meta-Regression Analysis," Review of Development Economics, Wiley Blackwell, vol. 14(s1), pages 640-655, 08.
  11. Haaparanta, Pertti, 1996. "Competition for foreign direct investments," Journal of Public Economics, Elsevier, vol. 63(1), pages 141-153, December.
  12. Enrico Pennings, . "How to Maximize Domestic Benefits from Irreversible Foreign Investments," Working Papers 205, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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