We study the choice of an MNE in deciding whether to establish a branch plant within a region, explicitly taking into account exit, as well as entry, costs. Protecting workers by having stict lay-off rules deters potential investment while subsidies attract it.

We examine the economic justification for providing investment subsidies to foreign-owned multinationals. These provide employment opportunities and generate demand for domestic intermediate inputs, produced by domestic workers with increasing returns to scale. Offering subsidies to...