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On the FDI-atrracting property of privatization

  • Oscar Amerigi

    ()

    (Dipartimento di Scienze Economiche, Universita di Bologna)

  • Giuseppe De Feo

    ()

    (Department of Economics, University of Strathclyde)

In this paper, we provide an explanation of why privatization may attract foreign investors willing to enter a regional market. Privatization turns the formerly-public firm into a less aggressive competitor since prot-maximizing output is lower than the welfaremaximizing one. The drawback is that social welfare generally decreases. We also investigate tax/subsidy competition for FDI and put forward its potentially positive role. On the one hand, it may reduce the negative impact on welfare of an FDI-attracting privatization. On the other hand, it may prevent a welfare-reducing investment by the foreign firm. This sheds light on the substitute/complementary relationship between the two policies and thetwo objectives of governments.

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File URL: http://www.strath.ac.uk/media/departments/economics/researchdiscussionpapers/2010/10-07_final.pdf
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Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 1007.

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Length: 28 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:str:wpaper:1007
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