Should Governments Subsidise Inward Foreign Direct Investment?

Mette Rose Skaksen

Scandinavian Journal of Economics, 2005, vol. 107, issue 1, 123-140

Abstract: What happens when a government has incentives to subsidise inward FDI when labour markets are imperfectly competitive? Contrary to the traditional assumption in the literature, we allow the production in the multinational firm to either complement or substitute for local production. A new result is that the wage in the host country may decrease when production is moved to this country. The reason is that the union in the host country internalises product market externalities between the firms. Furthermore, it is shown that when a single country subsidises inward FDI, total world welfare might increase.

Date: 2005
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