Working Paper: CEPR ID: DP2468
Authors: Chiara Fumagalli
Abstract: This paper studies the effects of subsidy competition for the location of a multinational enterprise (MNE). We assume that a (poorer) region enjoys larger gains from the positive externalities associated with the inward investment but that the MNE would find it more profitable to locate to the other (richer) region, subsidies being equal. In this setting, subsidy competition can improve aggregate welfare relative to a policy that bans grants because it gives the chance to the region that needs it more to attract the investment. The paper analyses under which conditions this is the case, assuming either that the multinational a priori decided to invest abroad or that exports are a feasible alternative to FDI. The welfare effects of subsidy competition can, accordingly, be extremely different.
Keywords: tax competition; foreign direct investments; business location
JEL Codes: F23; H73; H87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| subsidy competition (L13) | improved aggregate welfare (D69) |
| ability to offer subsidies (H20) | overbid richer region (D44) |
| overbid richer region (D44) | attract MNE (F23) |
| attract MNE (F23) | net welfare gain (D69) |
| positive externality from MNE's investment (F64) | higher aggregate welfare (D69) |
| disparity in economic conditions (F63) | subsidy competition yields higher aggregate welfare (D69) |
| MNE's decision to invest abroad vs exporting (F23) | welfare effects vary (D69) |