Inter-region Competition for FDI
This paper models inter-regional competition for FDI and optimal government policy intervention to protect the national interest. Two regional authorities bargain with a single multinational over where it will locate. This potentially leads to excessive competition between the regions, favouring the multinational. The federal government obviously wants to limit such competition but lacks information on comparative advantage. This paper examines its optimal policy. Among the main results we have the following two: First, the federal government would use tax policy to create asymmetries even when the underlying structure is symmetrical. Second, there are situations where, even though one MNC is more productive in one region, it is optimal for the country to make it go to the other one.
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- Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September.
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- Patrick Bolton & Michael D. Whinston, 1993. "Incomplete Contracts, Vertical Integration, and Supply Assurance," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 121-148.
- Litwack, John M. & Qian, Yingyi, 1998. "Balanced or Unbalanced Development: Special Economic Zones as Catalysts for Transition," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 117-141, March.
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