Subsidy Competition in Integrating Economies

Facundo Albornoz and Gregory Corcos
Authors registered in the RePEc Author Service: Facundo Albornoz ()

Discussion Papers from Department of Economics, University of Birmingham

Abstract: Regional integration affects location decisions of MNCs and therefore influences each member country’s provision of investment incentives, which in turn may trigger relocation. As a consequence, subsidy competition increases as integration proceeds. We analyze the welfare consequences of this phenomenon, modelling subsidization as a game between a MNC facing different location alternatives and governments that may deter or induce relocation by means of subsidies. We show that the combination of integration and subsidy competition may lead to an excess of subsidization. We also discuss how the interest of harmonizing subsidies, the net gains from integration crucially depend on technological differences, ownership and the absorption capacity of MNC profits by countries. Lastly, we find that the gain from supranational subsidy coordination increases with integration.

Keywords: Multinational Corporations; Regional Integration; FDI; Subsidy Competition; Location Choice (search for similar items in EconPapers)
JEL-codes: F15 F21 F23 H2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe
Date: 2005-10
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Related works:
Working Paper: Subsidy competition in integrating economies (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:bir:birmec:05-14

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