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Targeting FDI

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  • Wooton, Ian
  • Ferrett, Ben

Abstract

We study the tax/subsidy competition between the governments of two countries to attract the FDI projects of two firms. We assume that governments lack the capacity to target every potential inward investor with a tailored fiscal offer. Consequently, each government is constrained to bid for a single firm. In this environment, we show that subsidy competition, where both governments bid for the same firm, arises only if there is uncertainty over which country offers the more profitable location for the firm’s plant. Intuitively, such uncertainty leads to both governments believing that they might win the subsidy competition. In contrast, when the characteristics of the two countries are common knowledge, subsidy competition never arises in equilibrium, as the losing country would prefer to target the other firm. We also explore some of the welfare implications of governmental targeting constraints.

Suggested Citation

  • Wooton, Ian & Ferrett, Ben, 2019. "Targeting FDI," CEPR Discussion Papers 13573, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13573
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    References listed on IDEAS

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    1. 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.
    2. Fumagalli, Chiara, 2003. "On the welfare effects of competition for foreign direct investments," European Economic Review, Elsevier, vol. 47(6), pages 963-983, December.
    3. Ben Ferrett & Ian Wooton, 2010. "Tax competition and the international distribution of firm ownership: an invariance result," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(5), pages 518-531, October.
    4. Bjorvatn, Kjetil & Eckel, Carsten, 2006. "Policy competition for foreign direct investment between asymmetric countries," European Economic Review, Elsevier, vol. 50(7), pages 1891-1907, October.
    5. Davies, Ronald B., 2005. "State tax competition for foreign direct investment: a winnable war?," Journal of International Economics, Elsevier, vol. 67(2), pages 498-512, December.
    6. Keen, Michael, 2001. "Preferential Regimes Can Make Tax Competition Less Harmful," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(4), pages 757-762, December.
    7. 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.
    8. Janeba, Eckhard & Peters, Wolfgang, 1999. "Tax Evasion, Tax Competition and the Gains from Nondiscrimination: The Case of Interest Taxation in Europe," Economic Journal, Royal Economic Society, vol. 109(452), pages 93-101, January.
    9. 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.
    10. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 269-304, June.
    11. Keen, Michael, 2001. "Preferential Regimes Can Make Tax Competition Less Harmful," National Tax Journal, National Tax Association, vol. 54(n. 4), pages 757-62, December.
    12. Chong Ju Choi & Carla C. J. M. Millar & Caroline Y. L. Wong, 2005. "Knowledge and the State," Palgrave Macmillan Books, in: Knowledge Entanglements, chapter 0, pages 19-38, Palgrave Macmillan.
    13. Haufler, Andreas & Wooton, Ian, 2010. "Competition for firms in an oligopolistic industry: The impact of economic integration," Journal of International Economics, Elsevier, vol. 80(2), pages 239-248, March.
    14. 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.
    15. 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.
    16. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-1256, December.
    17. Chong Ju Choi & Carla C. J. M. Millar & Caroline Y. L. Wong, 2005. "Knowledge and Competition," Palgrave Macmillan Books, in: Knowledge Entanglements, chapter 0, pages 97-117, Palgrave Macmillan.
    18. Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, vol. 88(6), pages 1065-1091, June.
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    More about this item

    Keywords

    Foreign direct investment; Tax and 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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