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How to Maximize Domestic Benefits from Irreversible Foreign Investments


  • Enrico Pennings


When a foreign monopolist can either export to a host country or undertake an irreversible foreign direct investment (FDI), it is shown that the host government maximizes net domestic benefits by nearly fully subsidizing the investment cost in combination with taxing away benefits that exceed the gains from exporting. Since a higher tariff increases the firm’s propensity to invest and increases tax benefits, maximizing net domestic benefits yields an optimal tariff that is higher than the one derived in previous studies that disregard the dynamics of FDI and the interaction between optimal tax and tariff policy.

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  • Enrico Pennings, "undated". "How to Maximize Domestic Benefits from Irreversible Foreign Investments," Working Papers 205, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  • Handle: RePEc:igi:igierp:205

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    Cited by:

    1. Havranek, Tomas, 2008. "The Supply of Foreign Direct Investment Incentives: Subsidy Competition in an Oligopolistic Framework," MPRA Paper 10770, University Library of Munich, Germany.
    2. Tomáš Havránek, 2009. "The supply of foreign direct investment incentives: subsidy competition in an oligopolistic framework," Prague Economic Papers, University of Economics, Prague, vol. 2009(2), pages 131-155.

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