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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. |