Competition for FDI with vintage investment and agglomeration advantages

Kai Konrad and Dan Kovenock

Munich Reprints in Economics from University of Munich, Department of Economics

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. © 2009 Elsevier B.V. All rights reserved.

Keywords: agglomeration; capital flow; competition (economics); firm size; foreign direct investment; tax system (search for similar items in EconPapers)
JEL-codes: F21 H71 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (34)

Published in Journal of International Economics 2 79(2009): pp. 230-237

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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 (2008)
Working Paper: Competition for FDI with vintage investment and agglomeration advantages (2008)
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