Inter-jurisdiction Subsidy Competition for a New Production Plant: What is the Central Government Optimal Policy?

Osiris Parcero

No 601, CRIEFF Discussion Papers from Centre for Research into Industry, Enterprise, Finance and the Firm

Abstract: This paper models inter-jurisdiction competition for foreign direct investment and optimal government policy intervention to protect the national interest. The inter-jurisdiction competition for a multinational has the potential of favouring the multinational and of becoming detrimental for the host country. The central government wants to limit such competition but it cannot tax-discriminate between different types of multinationals. We find that the central government would use tax policy to create asymmetries even when the underlying structure is symmetrical. This offers a novel explanation for the creation of ‘Special Economic Zones’ in many countries, which are well known to be aimed at the attraction of foreign direct investment.

Keywords: Bargaining; subsidy; regional; competiton; FDI (search for similar items in EconPapers)
JEL-codes: F23 H25 H71 (search for similar items in EconPapers)
Date: 2006-05
New Economics Papers: this item is included in nep-pbe
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Journal Article: Inter-jurisdiction subsidy competition for a new production plant: What is the central government optimal policy? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:san:crieff:0601

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