Targeting FDI

Ian Wooton () and Ben Ferrett

No 13573, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the tax/subsidy competition between the governments of two countries to attract the FDI projects of two firms. We assume that governments lack the capacity to target every potential inward investor with a tailored fiscal offer. Consequently, each government is constrained to bid for a single firm. In this environment, we show that subsidy competition, where both governments bid for the same firm, arises only if there is uncertainty over which country offers the more profitable location for the firm’s plant. Intuitively, such uncertainty leads to both governments believing that they might win the subsidy competition. In contrast, when the characteristics of the two countries are common knowledge, subsidy competition never arises in equilibrium, as the losing country would prefer to target the other firm. We also explore some of the welfare implications of governmental targeting constraints.

Keywords: Foreign direct investment; Tax and subsidy competition; Efficiency (search for similar items in EconPapers)
JEL-codes: F12 F23 H25 H73 (search for similar items in EconPapers)
Date: 2019-03
New Economics Papers: this item is included in nep-int and nep-pbe
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Journal Article: Targeting FDI (2021)
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