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Subsidy Competition and the Mode of FDI: Acquisition vs Greenfield

  • Facundo Albornoz, Gregory Corcos and Toby Kendall

We model subsidy competition for a foreign MNC’s investment in a two-country PTA. Taking into account acquisitions as an alternative investment mode weakens the case for subsidising greenfield investment, even for a single government. Considering competition between member states, it widens the scope of harmful subsidy competition. While our predictions are sensitive to the acquisition price, we predict that in many cases a ban on subsidies may increase welfare. In addition, we show how trade integration and increased competition for targets raise the prospects for social waste. Finally, if FDI entails significant positive spillovers to the host country, fiercer competition for investment and greater welfare losses should be expected.

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Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 05-15.

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Length: 43 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:bir:birmec:05-15
Contact details of provider: Postal: Edgbaston, Birmingham, B15 2TT
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  1. Neary, J Peter, 2002. "Foreign Direct Investment and the Single Market," CEPR Discussion Papers 3419, C.E.P.R. Discussion Papers.
  2. Neary, J. Peter, 2004. "Cross-Border Mergers as Instruments of Comparative Advantage," Center for European, Governance and Economic Development Research Discussion Papers 34, University of Goettingen, Department of Economics.
  3. Maurice Kugler, 2006. "Spillovers From Foreign Direct Investment:Within Or Between Industries?," BORRADORES DE ECONOMIA 003523, BANCO DE LA REPÚBLICA.
  4. Keith Head & John Ries, 1997. "International Mergers and Welfare under Decentralized Competition Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 1104-23, November.
  5. Neary, J. Peter, 2004. "Cross-Border Mergers as Instruments of Comparative Advantage," Center for European, Governance and Economic Development Research Discussion Papers 34, University of Goettingen, Department of Economics.
  6. Haaland, Jan I. & Wooton, Ian, 1998. "International Competition for Multinational Investment," CEPR Discussion Papers 1937, C.E.P.R. Discussion Papers.
  7. Horst Raff, 2002. "Preferential Trade Agreements and Tax Competition for Foreign Direct Investment," CESifo Working Paper Series 763, CESifo Group Munich.
  8. Rodney D. Ludema & Ian Wooton, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," International Trade 9801001, EconWPA.
  9. Andreas Haufler & Ian Wooton, 2001. "Regional Tax Coordination and Foreign Direct Investment," CESifo Working Paper Series 628, CESifo Group Munich.
  10. Wilfred J. Ethier, 1998. "Regionalism in a Multilateral World," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1214-1245, December.
  11. Bjorvatn, Kjetil, 2004. "Economic integration and the profitability of cross-border mergers and acquisitions," European Economic Review, Elsevier, vol. 48(6), pages 1211-1226, December.
  12. Barros, Pedro P & Cabral, Luis, 2000. "Competing for Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 360-71, May.
  13. Haufler, Andreas & Wooton, Ian, 1997. "Tax Competition for Foreign Direct Investment," CEPR Discussion Papers 1583, C.E.P.R. Discussion Papers.
  14. Smarzynska, Beata K., 2002. "Does foreign direct investment increase the productivity of domestic firms : in search of spillovers through backward linkages," Policy Research Working Paper Series 2923, The World Bank.
  15. Dupont, Vincent & Martin, Philippe, 2003. "Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic," CEPR Discussion Papers 4107, C.E.P.R. Discussion Papers.
  16. Motta, Massimo & Norman, George, 1996. "Does Economic Integration Cause Foreign Direct Investment?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 757-83, November.
  17. Andrew Charlton, 2003. "Incentive Bidding for Mobile Investment: Economic Consequences and Potential Responses," OECD Development Centre Working Papers 203, OECD Publishing.
  18. Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, vol. 89(3), pages 605-618, June.
  19. Mattoo, Aaditya & Olarreaga, Marcelo & Saggi, Kamal, 2004. "Mode of foreign entry, technology transfer, and FDI policy," Journal of Development Economics, Elsevier, vol. 75(1), pages 95-111, October.
  20. Kind, Hans Jarle & Schjelderup, Guttorm & Ulltveit-Moe, Karen-Helene, 1999. "Competing for Capital in a 'Lumpy' World," CEPR Discussion Papers 2188, C.E.P.R. Discussion Papers.
  21. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  22. repec:tpr:qjecon:v:98:y:1983:i:2:p:185-99 is not listed on IDEAS
  23. Norman, George & Motta, Massimo, 1993. "Eastern European Economic Integration and Foreign Direct Investment," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(4), pages 483-507, Winter.
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