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Competition for FDI with Vintage Investment and Agglomeration Advantages

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  • Kovenock, Dan
  • Konrad, Kai A.

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.

Suggested Citation

  • Kovenock, Dan & Konrad, Kai A., 2008. "Competition for FDI with Vintage Investment and Agglomeration Advantages," CEPR Discussion Papers 6740, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:6740
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    More about this item

    Keywords

    Agglomeration; Bidding for firms; Dynamic tax competition; Foreign direct investment; Vintage capital;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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