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Privatization and policy competition for FDI

  • Oscar, AMERIGHI

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))

  • Giuseppe, DE FEO

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))

In this paper, we provide an explanation of why privatization may attract foreign investors interested in entering a regional market. Privatization turns the formerly-public firm into a less aggressive competitor since profit-maximizing output is lower than the welfare-maximizing one. The drawback is that social welfare generally decreases. We also investigate tax/subsidy competition for FDI before and after privatization. We show that policy competition is irrelevant in the presence of a public firm serving just its domestic market. By contrast, following privatization, it endows the big country with an instrument which can be used either to reduce the negative impact on welfare of an FDI-attracting privatization or to protect the domestic industry from foreign competitors.

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Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2008002.

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Length: 32
Date of creation: 01 Feb 2008
Date of revision:
Handle: RePEc:ctl:louvec:2008002
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