Subsidies for FDI: Implications from a model with heterogeneous firms
Davin Chor ()
Journal of International Economics, 2009, vol. 78, issue 1, 113-125
This paper analyzes the welfare effects of subsidies to attract multinational corporations when firms are heterogeneous in their productivity levels. I show that the use of a small subsidy raises welfare in the FDI host country, with the consumption gains from attracting more multinationals exceeding the direct cost of funding the subsidy program through a tax on labor income. This welfare gain stems from a selection effect, whereby the subsidy induces only the most productive exporters to switch to servicing the host's market via FDI. I further show that for the same total subsidy bill, a subsidy to variable costs delivers a larger welfare gain than a subsidy to the fixed cost of conducting FDI, since a variable cost subsidy also raises the inefficiently low output levels stemming from each firm's markup pricing power.
Keywords: FDI; subsidies; Heterogeneous; firms; Fixed; versus; variable; cost; subsidies; Import; subsidies (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (78) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: Subsides for FDI: Implications from a Model with Heterogeneous Firms (2007)
Working Paper: Subsidies for FDI: Implications from a Model with Heterogeneous Firms (2007)
Working Paper: Subsidies for FDI: Implications from a Model with Heterogenous Firms (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:78:y:2009:i:1:p:113-125
Access Statistics for this article
Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and RodrÃguez-Clare, AndrÃ©s
More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().