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Competition for FDI with vintage investment and agglomeration advantages
[Wettbewerb um ausländische Direktinvestitionen mit "vintage investment" und Agglomerationsvorteilen]

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  • Konrad, Kai A.
  • Kovenock, Dan

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 infinite horizon, focussing on Markov perfect equilibrium in stationary strategies. We show that 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. Moreover, the agglomeration advantage is valuable, but is exploited in the short run and can be unstable over time.

Suggested Citation

  • Konrad, Kai A. & Kovenock, Dan, 2008. "Competition for FDI with vintage investment and agglomeration advantages [Wettbewerb um ausländische Direktinvestitionen mit "vintage investment" und Agglomerationsvorteilen]," Discussion Papers, Research Unit: Market Processes and Governance SP II 2008-09, WZB Berlin Social Science Center.
    • Handle: RePEc:zbw:wzbmpg:spii200809
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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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