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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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File URL: ftp://ftp.bham.ac.uk/pub/RePEc/pdf/Albornoz-Corcos-Kendall.pdf
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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
Web page: http://www.economics.bham.ac.uk

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