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On the welfare effects of competition for foreign direct investments

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Chiara Fumagalli

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EER (2003)

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l   This paper investigates the welfare effects of allowing to offer subsidies for FDI.

l   If the MNE invests abroad even in the absence of incentives, subsidies may play the positive role of leading the investment where it generates the highest benefits (the poorer location) and where it would not locate otherwise.

l   This improves the welfare of the poorer region but harms the advanced one.

l   Under the assumption that the MNE exports in the absence of incentives, the paper demonstrates that the welfare effects can dramatically change.

l   First, subsidies attract the FDI, which otherwise would not take place, in one of the two regions.

l   Second, by inducing the MNE to switch from exports to FDI, subsidies increase the degree of competition in the market.