Working Paper: CEPR ID: DP1937
Authors: Jan I. Haaland; Ian Wooton
Abstract: We examine the economic justification for providing investment subsidies to foreign-owned multinationals. These provide employment opportunities and generate demand for domestic intermediate inputs, produced by domestic workers with increasing returns to scale. Offering subsidies to multinationals may be in the national interest if the investment raises the net value of domestic production. When agglomerative forces are sufficiently strong, a subsidy that attracts the first foreign firm may induce several to enter, establishing a thriving modern sector. With a limited number of foreign enterprises, countries may compete to attract investment. This subsidy competition transfers much of the rents to the multinationals.
Keywords: multinationals; foreign direct investment; location policy; competition
JEL Codes: F12; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Subsidies to MNEs (F23) | Increase FDI (F21) |
| Increase FDI (F21) | Generate employment (J68) |
| Increase FDI (F21) | Stimulate demand for local intermediate goods (F16) |
| Subsidies to MNEs (F23) | Generate employment (J68) |
| Subsidies to MNEs (F23) | Stimulate demand for intermediate goods (E22) |
| Initial subsidy (H20) | Chain reaction of investments (G11) |
| Cost of subsidies > Economic gains (H29) | Null result (Y70) |