IDEAS home Printed from https://ideas.repec.org/p/eui/euiwps/eco2006-41.html
   My bibliography  Save this paper

State Aid to Attract FDI and the European Competition Policy: Should Variable Cost Aid Be Banned?

Author

Listed:
  • Mario Mariniello

Abstract

The purpose of this paper is to analyze the European Commission's approach to state aid for foreign direct investment in a competition policy framework. The Commission shows to consider variable cost aid (VCA) to be more distortive than start-up or fixed cost aid (FCA). This paper addresses that issue and checks whether allowing FCA while banning VCA is a first-best strategy for a rational Authority maximizing welfare. The model shows that a rational forward-looking government maximizing domestic welfare always prefers VCA to FCA if both the incumbent and the entrant are foreign firms and if granting VCA does not cause to the incumbent firm to exit the market. On the other hand, a VCA which causes the incumbent firm to be crowded out by the entrant never occurs at the equilibrium. The model shows that the Commission's approach may lead to sub-optimal equilibria where market competition and consumers.welfare are not maximized.

Suggested Citation

  • Mario Mariniello, 2006. "State Aid to Attract FDI and the European Competition Policy: Should Variable Cost Aid Be Banned?," Economics Working Papers ECO2006/41, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2006/41
    as

    Download full text from publisher

    File URL: http://cadmus.iue.it/dspace/bitstream/1814/6686/1/ECO%202006-41.pdf
    File Function: main text
    Download Restriction: no

    References listed on IDEAS

    as
    1. Markusen, James R. & Venables, Anthony J., 1999. "Foreign direct investment as a catalyst for industrial development," European Economic Review, Elsevier, vol. 43(2), pages 335-356, February.
    2. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, May.
    3. Fumagalli, Chiara, 2003. "On the welfare effects of competition for foreign direct investments," European Economic Review, Elsevier, vol. 47(6), pages 963-983, December.
    4. Neven, Damien J. & Roller, Lars-Hendrik, 2005. "Consumer surplus vs. welfare standard in a political economy model of merger control," International Journal of Industrial Organization, Elsevier, vol. 23(9-10), pages 829-848, December.
    5. Barros, Pedro P & Cabral, Luis, 2000. "Competing for Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 360-371, May.
    6. Rchard Schmalensee, 2004. "Sunk Costs and Antitrust Barriers to Entry," American Economic Review, American Economic Association, vol. 94(2), pages 471-475, May.
    7. Markusen, James R. & Morey, Edward R. & Olewiler, Nancy, 1995. "Competition in regional environmental policies when plant locations are endogenous," Journal of Public Economics, Elsevier, vol. 56(1), pages 55-77, January.
    8. David R Collie, 2005. "State aid to investment and R&D," European Economy - Economic Papers 2008 - 2015 231, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    9. Collie, David R., 2000. "State aid in the European Union: The prohibition of subsidies in an integrated market," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 867-884, August.
    10. David Collie, 2002. "Prohibiting State Aid in an Integrated Market: Cournot and Bertrand Oligopolies with Differentiated Products," Journal of Industry, Competition and Trade, Springer, vol. 2(3), pages 215-231, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mario Mariniello, 2013. "Should Variable Cost Aid to Attract Foreign Direct Investment be Banned? A European Perspective," Journal of Industry, Competition and Trade, Springer, vol. 13(2), pages 273-308, June.
    2. Kolesnikova, Irina, 2010. "State Aid for Industrial Enterprises in Belarus: Remedy or Poison?," MPRA Paper 22403, University Library of Munich, Germany.
    3. Kolesnikova Irina, 2010. "State Aid for Industrial Enterprises in Belarus: Remedy or Poison?," EERC Working Paper Series 10/01e, EERC Research Network, Russia and CIS.

    More about this item

    Keywords

    state aid; competition policy; start-up aid; variable cost aid;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L53 - Industrial Organization - - Regulation and Industrial Policy - - - Enterprise Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eui:euiwps:eco2006/41. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julia Valerio). General contact details of provider: http://edirc.repec.org/data/deiueit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.