Foreign direct investment subsidy in a dynamic stochastic general equilibrium model with heterogeneous firms

Yen-Chen Wu (), Shikuan Chen and Ming‐Jen Chang

Review of International Economics, 2019, vol. 27, issue 5, 1427-1459

Abstract: This study analyzes the macroeconomic impacts of subsidies to attract multinational corporations when firms are determining whether to enter or how to serve foreign markets. We show that a small FDI subsidy scheme induces consumption gains and delivers short‐term welfare improvement for the FDI host country if firms differ in productivity. However, the subsidy generates a new problem and results in the wealth reallocation effect, leading to welfare deterioration for the host country in the long run. Moreover, we find that a subsidy program induces a welfare improvement for the host country if it is offered to all domestic producers instead of foreign producers only in the host country.

Date: 2019
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https://doi.org/10.1111/roie.12430

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