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Bidding for horizontal multinationals

Author

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  • BEHRENS, Kristian
  • PICARD, Pierre M.

Abstract

We present a model in which governments bid for firms by taxing/subsidizing setup costs. Firms choose both the number and the location of the plants they operate, and the equilibrium industry structure is affected by governments' subsidy choices. We show that the endogenous presence of horizontal multinationals attenuates the race to the bottom and yields some results that run counter to traditional findings in the literature. First, in the presence of multinationals, increasing subsidies decrease firms' profits by exacerbating price competition due to more firms going multinational. Second, instead of being always subsidized, firms may actually be taxed in equilibrium. Last, subsidies may become strategically independent policy instruments, instead of being strategic complements. (JEL: F12, F23, H27, H73, R12) (c) 2008 by the European Economic Association.
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Suggested Citation

  • BEHRENS, Kristian & PICARD, Pierre M., 2009. "Bidding for horizontal multinationals," LIDAM Reprints CORE 2176, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:2176
    Note: In : Journal of the European Economic Association, 6(6), 1244-1278, 2008
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    Cited by:

    1. Osiris J. Parcero, 2009. "Optimal country's policy towards multinationals when local regions can choose between firm-specific and non-firm-specific policies," Working Papers 2009/34, Institut d'Economia de Barcelona (IEB).
    2. Li, Yan & Chen, Zhenhua & Wang, Peng, 2020. "Impact of high-speed rail on urban economic efficiency in China," Transport Policy, Elsevier, vol. 97(C), pages 220-231.
    3. Blanchard, Pierre & Gaigné, Carl & Mathieu, Claude, 2012. "Trade costs and international strategy of firms: The role of endogenous product differentiation," Regional Science and Urban Economics, Elsevier, vol. 42(6), pages 1023-1036.
    4. Hong Feng & Jie Ma & Yang Yue, 2023. "Competition for multiproduct firms," Review of International Economics, Wiley Blackwell, vol. 31(3), pages 904-930, August.
    5. Osiris Jorge Parcero, 2024. "Optimal National policies towards multinationals when local regions can choose between firm-specific and non-firm-specific policies," Papers 2401.04243, arXiv.org.
    6. Lapointe, Simon & Morand, Pierre-Henri, 2019. "Subsidy Bidding Wars and the Structure of Multi-Plant Firms," Working Papers 115, VATT Institute for Economic Research.
    7. Pierre Blanchard & Carl Gaigné & Claude Mathieu, 2012. "Trade Costs and Endogenous Product Differentiation for International Firms," Erudite Working Paper 2012-07, Erudite.
    8. Osiris J. Parcero, 2009. "Optimal country's policy towards multinationals when local regions can choose between firm-specific and non-firm-specific policies," Working Papers 2009/34, Institut d'Economia de Barcelona (IEB).
    9. Kristian Behrens & Frédéric Robert‐Nicoud, 2009. "Krugman's Papers in Regional Science: The 100 dollar bill on the sidewalk is gone and the 2008 Nobel Prize well‐deserved," Papers in Regional Science, Wiley Blackwell, vol. 88(2), pages 467-489, June.
    10. Nils Herger & Christos Kotsogiannis & Steve McCorriston, 2011. "International Taxation and FDI Strategies: Evidence From US Cross-Border Acquisitions," Discussion Papers 1109, University of Exeter, Department of Economics.
    11. Amerighi, Oscar & Peralta, Susana, 2010. "The proximity-concentration trade-off with profit shifting," Journal of Urban Economics, Elsevier, vol. 68(1), pages 90-101, July.
    12. Jie Ma & Pascalis Raimondos, 2015. "Competition for FDI and Profit Shifting," CESifo Working Paper Series 5153, CESifo.
    13. Ronald B. Davies & Yutao Han & Kate Hynes & Yong Wang, 2020. "Competition in Taxes and IPR," Working Papers 202019, School of Economics, University College Dublin.
    14. Ronald B. Davies & Yutao Han & Kate Hynes & Yong Wang, 2023. "Competition in taxes and intellectual property right," Review of International Economics, Wiley Blackwell, vol. 31(3), pages 931-955, August.
    15. O. Amerighi & S. Peralta, 2007. "Exports Versus Horizontal Foreign Direct Investment with Profit Shifting," Working Papers 604, Dipartimento Scienze Economiche, Universita' di Bologna.

    More about this item

    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
    • H27 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other Sources of Revenue
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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