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Subsidy Competition and the Mode of FDI: Acquisition vs Greenfield

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Listed author(s):
  • Facundo Albornoz, Gregory Corcos and Toby Kendall

Abstract

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
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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Find related papers by JEL classification:
  • F15 - International Economics - - Trade - - - Economic Integration
  • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
  • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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  8. Haufler, Andreas & Wooton, Ian, 2001. "Regional tax coordination and foreign direct investment," Center for European, Governance and Economic Development Research Discussion Papers 14, University of Goettingen, Department of Economics.
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  17. 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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  20. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  21. Barros, Pedro P & Cabral, Luis, 2000. "Competing for Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 360-371, May.
  22. Keith Head & John Ries, 1997. "International Mergers and Welfare under Decentralized Competition Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 1104-1123, November.
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Cited by:

  1. Kai Zhao, 2011. "Entry mode choice and target firm selection: private and collective incentive analysis," Working Papers halshs-00856139, HAL.

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