Competition for FDI with Vintage Investment and Agglomeration Advantages

Dan Kovenock and Kai Konrad

No 6740, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Countries compete for new FDI investment, whereas stocks of FDI generate agglomeration benefits and are potentially subject to extortionary taxation. We study the interaction between these aspects in a simple vintage capital framework with discrete time and an infinite horizon, focussing on Markov perfect equilibrium. We show that the equilibrium taxation destabilizes agglomeration advantages. The agglomeration advantage is valuable, but is exploited in the short run. The tax revenue in the equilibrium is substantial, and higher on "old" FDI than on "new" FDI, even though countries are not allowed to use discriminatory taxation. If countries can provide fiscal incentives for attracting new firms, this stabilizes existing agglomeration advantages, but may erode the fiscal revenue in the equilibrium.

Keywords: Agglomeration; Bidding for firms; Dynamic tax competition; Foreign direct investment; Vintage capital (search for similar items in EconPapers)
JEL-codes: F21 H71 (search for similar items in EconPapers)
Date: 2008-03
New Economics Papers: this item is included in nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Competition for FDI with vintage investment and agglomeration advantages (2009)
Working Paper: Competition for FDI with vintage investment and agglomeration advantages (2009)
Working Paper: Competition for FDI with vintage investment and agglomeration advantages (2009)
Working Paper: Competition for FDI with vintage investment and agglomeration advantages (2008)
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