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Competition for FDI with vintage investment and agglomeration advantages

Author

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  • Kai A. Konrad

    (Free University of Berlin and Social Science Research Centre Berlin (WZB))

  • Dan Kovenoch

    (University of Iowa)

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

  • Kai A. Konrad & Dan Kovenoch, 2009. "Competition for FDI with vintage investment and agglomeration advantages," Working Papers 2009/18, Institut d'Economia de Barcelona (IEB).
    • Handle: RePEc:ieb:wpaper:doc2009-18
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    More about this item

    Keywords

    Dynamic tax competition; vintage capital; agglomeration; foreign direct investment; bidding for firms;
    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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