Competing for Foreign Direct Investment.
The paper analyzes "subsidy games" between countries in order to attract foreign direct investment (FDI) from a third country. The winner of this game results from the interaction of two factors, relative country size and employment gains from FDI: a large (or "central") country is more likely to attract FDI, and so is a country with high unemployment. The subsidy equilibrium is compared with two alternative solutions: zero subsidies and first-best subsidies. It is shown that total welfare may be greater under subsidy competition than under zero subsidies: the gains from efficient location implied by subsidy competition may more than outweigh the losses from higher subsidies. Moreover, departing from subsidy competition to zero subsidies or to first-best subsidies (without side payments) implies a gain to one country and a loss to the other. This suggests that it may be difficult to reach a consensus to move away from the status quo of subsidy competition. Copyright 2000 by Blackwell Publishing Ltd.
Year of publication: |
2000
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Authors: | Barros, Pedro P ; Cabral, Luis |
Published in: |
Review of International Economics. - Wiley Blackwell, ISSN 0965-7576. - Vol. 8.2000, 2, p. 360-71
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Publisher: |
Wiley Blackwell |
Saved in:
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