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Targeting FDI

Author

Listed:
  • Ben Ferrett

    (Loughborough University
    University of Nottingham)

  • Ian Wooton

    (University of Strathclyde
    CEPR
    CESifo)

Abstract

We study the tax/subsidy competition between two countries to attract the FDI projects of two firms. We assume that governments lack the capacity to target every potential inward investor such that each can only bid for a single firm. When the characteristics of the two countries are common knowledge, subsidy competition never arises in equilibrium. Both governments may target the same firm if there is uncertainty as to the more profitable location for that firm’s plant, such that both governments believe they may win the competition. We also explore how such uncertainty affects the firms’ after-tax profits.

Suggested Citation

  • Ben Ferrett & Ian Wooton, 2021. "Targeting FDI," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(2), pages 366-385, April.
    • Handle: RePEc:kap:itaxpf:v:28:y:2021:i:2:d:10.1007_s10797-020-09628-z
    DOI: 10.1007/s10797-020-09628-z
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    References listed on IDEAS

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    1. Janeba, Eckhard & Smart, Michael, 2003. "Is Targeted Tax Competition Less Harmful Than Its Remedies?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(3), pages 259-280, May.
    2. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
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    4. Ben Ferrett & Ian Wooton, 2010. "Competing for a duopoly: international trade and tax competition," Canadian Journal of Economics, Canadian Economics Association, vol. 43(3), pages 776-794, August.
    5. Taiji Furusawa & Kazumi Hori & Ian Wooton, 2015. "A race beyond the bottom: the nature of bidding for a firm," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(3), pages 452-475, June.
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    13. Marceau, Nicolas & Mongrain, Steeve & Wilson, John D., 2010. "Why do most countries set high tax rates on capital?," Journal of International Economics, Elsevier, vol. 80(2), pages 249-259, March.
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    More about this item

    Keywords

    Foreign direct investment; Tax/subsidy competition; Efficiency;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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