IDEAS home Printed from https://ideas.repec.org/p/pur/prukra/1210.html
   My bibliography  Save this paper

Competition for FDI with vintage investment and agglomeration advantages

Author

Listed:
  • Kai A. Konrad
  • Dan Kovenock

Abstract

Countries compete for new FDI investment, whereas stocks of FDI generate agglomeration benefits and are potentially subject to extortionary taxation. We study the interaction between these aspects in a simple vintage capital framework with discrete time and an infinite horizon, focussing on Markov perfect equilibrium. We show that the equilibrium taxation destabilizes agglomeration advantages. The agglomeration advantage is valuable, but is exploited in the short run. The tax revenue in the equilibrium is substantial, and higher on "old" FDI than on "new" FDI, even though countries are not allowed to use discriminatory taxation. If countries can provide fiscal incentives for attracting new firms, this stabilizes existing agglomeration advantages, but may erode the fiscal revenue in the equilibrium.

Suggested Citation

  • Kai A. Konrad & Dan Kovenock, 2008. "Competition for FDI with vintage investment and agglomeration advantages," Purdue University Economics Working Papers 1210, Purdue University, Department of Economics.
    • Handle: RePEc:pur:prukra:1210
    as

    Download full text from publisher

    File URL: https://business.purdue.edu/research/Working-papers-series/2008/1210.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Wildasin, David E., 2003. "Fiscal competition in space and time," Journal of Public Economics, Elsevier, vol. 87(11), pages 2571-2588, October.
    2. Jonathan Thomas & Tim Worrall, 1994. "Foreign Direct Investment and the Risk of Expropriation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(1), pages 81-108.
    3. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
    4. Janeba, Eckhard & Peters, Wolfgang, 1999. "Tax Evasion, Tax Competition and the Gains from Nondiscrimination: The Case of Interest Taxation in Europe," Economic Journal, Royal Economic Society, vol. 109(452), pages 93-101, January.
    5. Devereux, Michael P. & Griffith, Rachel & Simpson, Helen, 2007. "Firm location decisions, regional grants and agglomeration externalities," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 413-435, April.
    6. Konrad, Kai A. & Erik Lommerud, Kjell, 2001. "Foreign direct investment, intra-firm trade and ownership structure," European Economic Review, Elsevier, vol. 45(3), pages 475-494, March.
    7. Marceau, Nicolas & Mongrain, Steeve & Wilson, John D., 2010. "Why do most countries set high tax rates on capital?," Journal of International Economics, Elsevier, vol. 80(2), pages 249-259, March.
    8. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-366, May.
    9. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-449, October.
    10. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
    11. Andersson, Fredrik & Konrad, Kai A., 2003. "Human capital investment and globalization in extortionary states," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1539-1555, August.
    12. Baye, Michael R. & Kovenock, Dan & de Vries, Casper G., 1992. "It takes two to tango: Equilibria in a model of sales," Games and Economic Behavior, Elsevier, vol. 4(4), pages 493-510, October.
    13. Schnitzer, Monika, 1999. "Expropriation and control rights: A dynamic model of foreign direct investment," International Journal of Industrial Organization, Elsevier, vol. 17(8), pages 1113-1137, November.
    14. Anderson, Eric T. & Kumar, Nanda & Rajiv, Surendra, 2004. "A comment on: "Revisiting dynamic duopoly with consumer switching costs"," Journal of Economic Theory, Elsevier, vol. 116(1), pages 177-186, May.
    15. Baldwin, Richard E. & Krugman, Paul, 2004. "Agglomeration, integration and tax harmonisation," European Economic Review, Elsevier, vol. 48(1), pages 1-23, February.
    16. Roderick Duncan, 2006. "Price or politics? An investigation of the causes of expropriation," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(1), pages 85-101, March.
    17. Dietmar Harhoff, 2008. "Innovation, Entrepreneurship und Demographie," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 9(s1), pages 46-72, May.
    18. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 31, pages 1967-2072, Elsevier.
    19. repec:bla:perwir:v:9:y:2008:i:3:p:46-72 is not listed on IDEAS
    20. Hatfield, John, 2006. "Federalism, Taxation, and Economic Growth," Research Papers 1929, Stanford University, Graduate School of Business.
    21. Deneckere, Raymond J & Kovenock, Dan & Lee, Robert, 1992. "A Model of Price Leadership Based on Consumer Loyalty," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 147-156, June.
    22. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-1256, December.
    23. Eckhard Janeba, 2000. "Tax Competition When Governments Lack Commitment: Excess Capacity as a Countervailing Threat," American Economic Review, American Economic Association, vol. 90(5), pages 1508-1519, December.
    24. Strange, William & Hejazi, Walid & Tang, Jianmin, 2006. "The uncertain city: Competitive instability, skills, innovation and the strategy of agglomeration," Journal of Urban Economics, Elsevier, vol. 59(3), pages 331-351, May.
    25. Kind, Hans Jarle & Knarvik, Karen Helene Midelfart & Schjelderup, Guttorm, 2000. "Competing for capital in a 'lumpy' world," Journal of Public Economics, Elsevier, vol. 78(3), pages 253-274, November.
    26. Patrick J. Kehoe, 1989. "Policy Cooperation Among Benevolent Governments May Be Undesirable," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(2), pages 289-296.
    27. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition [‘Do domestic firms benefit from direct foreign investment? Evidence from Venezuela’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 17(35), pages 449-495.
    28. Guy Dumais & Glenn Ellison & Edward L. Glaeser, 2002. "Geographic Concentration As A Dynamic Process," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 193-204, May.
    29. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
    30. Holmes, Thomas J., 1999. "How Industries Migrate When Agglomeration Economies Are Important," Journal of Urban Economics, Elsevier, vol. 45(2), pages 240-263, March.
    31. Wang, Xuejun, 2004. "Tax evasion, tax competition and gains from nondiscrimination with equilibrium mixed strategies," Economics Letters, Elsevier, vol. 83(3), pages 377-381, June.
    32. Timothy Besley & Paul Seabright, 1999. "The effects and policy implications of state aids to industry: an economic analysis," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 14(28), pages 14-53.
    33. Sebastian Kessing & Kai Konrad & Christos Kotsogiannis, 2009. "Federalism, weak institutions and the competition for foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(1), pages 105-123, February.
    34. Haupt, Alexander & Peters, Wolfgang, 2005. "Restricting preferential tax regimes to avoid harmful tax competition," Regional Science and Urban Economics, Elsevier, vol. 35(5), pages 493-507, September.
    35. Duncan, Roderick, 2006. "Price or politics? An investigation of the causes of expropriation," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(1), pages 1-17, March.
    36. Johann Peter Murmann & Ernst Homburg, 2001. "special feature: Comparing evolutionary dynamics across different national settings: the case of the synthetic dye industry, 1857-1914," Journal of Evolutionary Economics, Springer, vol. 11(2), pages 177-205.
    37. Chen, Yongmin & Rosenthal, Robert W., 1996. "Dynamic duopoly with slowly changing customer loyalties," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 269-296, May.
    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. Marceau, Nicolas & Mongrain, Steeve, 2011. "Competition in law enforcement and capital allocation," Journal of Urban Economics, Elsevier, vol. 69(1), pages 136-147, January.
    2. Rosete Alfredo R. M., 2018. "Understanding Investor Behavior in the Recent Global Land Rush," Journal of Globalization and Development, De Gruyter, vol. 9(1), pages 1-13, June.
    3. Jim Huangnan Shen & Hao Wang & Steve Chu‐Chia Lin, 2021. "Productivity Gap and Inward FDI Spillovers: Theory and Evidence from China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 29(2), pages 24-48, March.
    4. Ben Ferrett & Andreas Hoefele & Ian Wooton, 2019. "Does tax competition make mobile firms more footloose?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(1), pages 379-402, February.
    5. Elsayyad, May & Konrad, Kai A., 2012. "Fighting multiple tax havens," Journal of International Economics, Elsevier, vol. 86(2), pages 295-305.
    6. Alexander Haupt & Tim Krieger, 2009. "The role of mobility in tax and subsidy competition," Working Papers CIE 21, Paderborn University, CIE Center for International Economics.
    7. Rosete, Alfredo, 2015. "Expropriation and the Location of Farmland Investment: a theoretical investigation into the Land Rush," UMASS Amherst Economics Working Papers 2015-17, University of Massachusetts Amherst, Department of Economics.
    8. Hyun-Ju Koh & Nadine Riedel, 2010. "Do governments tax agglomeration rents?," Working Papers 2010/21, Institut d'Economia de Barcelona (IEB).
    9. Jaakkola, Niko & Spiro, Daniel & van Benthem, Arthur A., 2019. "Finders, keepers?," Journal of Public Economics, Elsevier, vol. 169(C), pages 17-33.
    10. Fatica, Serena, 2009. "Taxation and the quality of institutions: asymmetric effects on FDI," MPRA Paper 24179, University Library of Munich, Germany, revised Jun 2010.
    11. Haupt, Alexander & Krieger, Tim, 2020. "The role of relocation mobility in tax and subsidy competition," Journal of Urban Economics, Elsevier, vol. 116(C).
    12. Brülhart, Marius & Bucovetsky, Sam & Schmidheiny, Kurt, 2015. "Taxes in Cities," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 1123-1196, Elsevier.
    13. Marius Brülhart & Helen Simpson, 2018. "Agglomeration economies, taxable rents and government capture: evidence from a place-based policy," Journal of Economic Geography, Oxford University Press, vol. 18(2), pages 319-353.
    14. Alexander Haupt & Tim Krieger, 2009. "The Role of Mobility in Tax and Subsidy Competition," CESifo Working Paper Series 2555, CESifo Group Munich.
    15. Kaushal Kishore, 2016. "Dynamic Tax Competition, Home Bias and the Gain from Non-preferential Agreements," Working Papers 201676, University of Pretoria, Department of Economics.
    16. Steeve Mongrain & John D. Wilson, 2011. "Tax competition with heterogeneous capital mobility," Working Papers 2011/25, Institut d'Economia de Barcelona (IEB).
    17. Mongrain, Steeve & Wilson, John D., 2018. "Tax competition with heterogeneous capital mobility," Journal of Public Economics, Elsevier, vol. 167(C), pages 177-189.
    18. Kaushal Kishore, 2016. "Tax Competition, Policy Competition and the Strategic Use of Policy Restrictions on Foreign Direct Investments," Working Papers 201684, University of Pretoria, Department of Economics.
    19. Koh, Hyun-Ju & Riedel, Nadine & Böhm, Tobias, 2013. "Do governments tax agglomeration rents?," Journal of Urban Economics, Elsevier, vol. 75(C), pages 92-106.
    20. Kaushal Kishore, 2016. "Dynamic Inconsistency, Falling Cost of Capital Relocation and Preferential Taxation of Foreign Capital," Working Papers 201633, University of Pretoria, Department of Economics.
    21. Kishore, Kaushal & Roy, Santanu, 2014. "Dynamic inconsistency and non-preferential taxation of foreign capital," Economics Letters, Elsevier, vol. 124(1), pages 88-92.
    22. Langenmayr, Dominika Irma & Martin, Simmler, 2016. "Why the Current Tax Rate Tells You Little: Competing For Mobile and Immobile Firms," VfS Annual Conference 2016 (Augsburg): Demographic Change 145568, Verein für Socialpolitik / German Economic Association.
    23. Giorgio Barba Navaretti & Anthony J. Venables, 2013. "Multinationals and industrial policy," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 29(2), pages 361-382, SUMMER.
    24. Michael Keen & Kai A. Konrad, 2012. "International Tax Competition and Coordination," Working Papers international_tax_competi, Max Planck Institute for Tax Law and Public Finance.
    25. Tag, Mehmet Nasih & Degirmen, Suleyman, 2022. "Economic freedom and foreign direct investment: Are they related?," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 737-752.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Konrad, Kai A. & Kovenock, Dan, 2009. "Competition for FDI with vintage investment and agglomeration advantages," Journal of International Economics, Elsevier, vol. 79(2), pages 230-237, November.
    2. Kaushal Kishore, 2008. "Tax Competition, Imperfect Capital Mobility and the gain from non-preferential agreements," Departmental Working Papers 0804, Southern Methodist University, Department of Economics.
    3. Michael Keen & Kai A. Konrad, 2012. "International Tax Competition and Coordination," Working Papers international_tax_competi, Max Planck Institute for Tax Law and Public Finance.
    4. Kai Konrad, 2008. "Mobile tax base as a global common," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(4), pages 395-414, August.
    5. Lommerud, Kjell Erik & Olsen, Trond E. & Straume, Odd Rune, 2006. "Cross border mergers and strategic trade policy with two-part taxation: is international policy coordination beneficial? [Grenzüberschreitende Fusionen und strategische Handelspolitik mit zweiseiti," Discussion Papers, Research Unit: Market Processes and Governance SP II 2006-24, WZB Berlin Social Science Center.
    6. Johannes Becker & Michael Kriebel, 2017. "Fiscal equalisation schemes under competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(5), pages 800-816, September.
    7. Kaushal Kishore, 2016. "Tax Competition, Policy Competition and the Strategic Use of Policy Restrictions on Foreign Direct Investments," Working Papers 201684, University of Pretoria, Department of Economics.
    8. Rainald Borck & Hyun‐Ju Koh & Michael Pflüger, 2012. "Inefficient Lock‐In And Subsidy Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1179-1204, November.
    9. Carsten Hefeker & Sebastian G. Kessing, 2017. "Competition for natural resources and the hold-up problem," Canadian Journal of Economics, Canadian Economics Association, vol. 50(3), pages 871-888, August.
    10. Christensen, Jonas Gade, 2011. "Democracy and Expropriations," Working Papers in Economics 06/11, University of Bergen, Department of Economics.
    11. Alexander Haupt & Tim Krieger, 2009. "The role of mobility in tax and subsidy competition," Working Papers CIE 21, Paderborn University, CIE Center for International Economics.
    12. Sebastian Kessing & Kai Konrad & Christos Kotsogiannis, 2009. "Federalism, weak institutions and the competition for foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(1), pages 105-123, February.
    13. Elsayyad, May & Konrad, Kai A., 2012. "Fighting multiple tax havens," Journal of International Economics, Elsevier, vol. 86(2), pages 295-305.
    14. Gaigné, Carl & Wooton, Ian, 2011. "The gains from preferential tax regimes reconsidered," Regional Science and Urban Economics, Elsevier, vol. 41(1), pages 59-66, January.
    15. Kishore, Kaushal & Roy, Santanu, 2014. "Dynamic inconsistency and non-preferential taxation of foreign capital," Economics Letters, Elsevier, vol. 124(1), pages 88-92.
    16. Kaushal Kishore, 2016. "Dynamic Inconsistency, Falling Cost of Capital Relocation and Preferential Taxation of Foreign Capital," Working Papers 201633, University of Pretoria, Department of Economics.
    17. Kessing, Sebastian G. & Konrad, Kai A. & Kotsogiannis, Christos, 2006. "Federal tax autonomy and the limits of cooperation," Journal of Urban Economics, Elsevier, vol. 59(2), pages 317-329, March.
    18. Alexander Haupt & Tim Krieger, 2009. "The Role of Mobility in Tax and Subsidy Competition," CESifo Working Paper Series 2555, CESifo Group Munich.
    19. Elhauge, Einer & Wickelgren, Abraham L., 2015. "Robust exclusion and market division through loyalty discounts," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 111-121.
    20. Kaushal Kishore, 2016. "Dynamic Tax Competition, Home Bias and the Gain from Non-preferential Agreements," Working Papers 201676, University of Pretoria, Department of Economics.

    More about this item

    Keywords

    Dynamic tax competition; vintage capital; agglomeration; foreign direct investment; bidding for firms;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

    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:pur:prukra:1210. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Business PHD (email available below). General contact details of provider: https://edirc.repec.org/data/kspurus.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.