Welfare effects of competition for FDI between technologically asymmetric countries with varying trade costs

Kyoung Hwangbo and Young-Han Kim

Economic Modelling, 2013, vol. 35, issue C, 493-501

Abstract: Given the traditional argument that host countries' excessive competition for FDI (foreign direct investment) deteriorates the host countries' welfare, this paper examines the impact of policy competition for FDI on social welfare considering varying trade costs. Based on a model where two technologically asymmetric countries compete for FDI, we determine an equilibrium where a multinational firm relocates to a less efficient country. Moreover, we demonstrate that the policy competition for FDI between less integrated economies might improve social welfare when the multinational firm relocates to a country with a lower technology and a less competitive market. Nonetheless, we show that the traditional argument can be true when the policy competition for FDI between highly integrated economies deteriorates host countries' welfare, as supported by the empirical evidences of moderated competition for FDI within EU member countries.

Keywords: Policy competition for FDI; Location strategy of multinational firms; Technology asymmetry; Cross-border trade costs; Economic integration (search for similar items in EconPapers)
JEL-codes: F23 H32 H87 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:35:y:2013:i:c:p:493-501

DOI: 10.1016/j.econmod.2013.07.032

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