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Should Variable Cost Aid to Attract Foreign Direct Investment be Banned? A European Perspective

Mario Mariniello ()

Journal of Industry, Competition and Trade, 2013, vol. 13, issue 2, 273-308

Abstract: The purpose of this paper is to analyze the European Commission’s approach to state aid to attract foreign direct investment (FDI) in a competition policy framework. The Commission considers variable cost aid (VCA) to be more distortive than start-up or fixed cost aid (FCA). This paper addresses that issue and checks whether allowing FCA while banning VCA is an optimal strategy for a supranational Competition Authority maximizing welfare. The model shows that a domestic government maximizing welfare always prefers VCA to FCA if both the incumbent and the entrant are foreign firms and if granting VCA does not cause the incumbent firm to exit the market. The model shows that banning VCA may lead to sub-optimal equilibria where welfare is not maximized. Copyright Springer Science+Business Media, LLC 2013

Keywords: state aid; competition policy; start-up aid; fixed cost aid; variable cost aid; L11; L13; L40; L53 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s10842-011-0124-3

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Journal of Industry, Competition and Trade is currently edited by Karl Aiginger, Marcel Canoy and Michael Peneder

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