Market equilibrium effects of incentives to foreign direct investment

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Abstract

This note shows that a country may want to give a certain type of incentive to foreign direct investment (subsidy to marginal costs of the foreign firm), even if no further gains (job creation, technology transfer and the like) are available. The crucial element is that subsidies may change the market equilibrium in a favorable way to the country.

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Cited by (4)

  • Should governments compete for foreign direct investment?

    2006, Journal of Economic Behavior and Organization
    Citation Excerpt :

    In considering the established tax policy in the larger country, the firm, when offered a tax incentive that could possibly change from the smaller country, chooses to set up capacity and then produce in either of the two countries, or in both of them. Some other papers that relate to ours include Barros (1994); Motta (1992); Kaufmann and Wei (1999), and Smarzynska and Wei (2000). We make two main contributions to this literature.

  • Multinational enterprises: Their private and social benefits and costs

    2007, World Economy

  • Competing for foreign direct investment

    2000, Review of International Economics

  • Foreign direct investment and industry structure

    1999, Journal of Economic Studies
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