Subsidy Competition and the Mode of FDI
39 Pages Posted: 21 Sep 2007 Last revised: 28 Nov 2009
Date Written: January 18, 2008
We model subsidy competition for a foreign MNC's investment in two trading partners. Taking into account acquisitions as an alternative investment mode weakens the case for subsidising greenfield investment. Competition between countries results in welfare losses, even more so if positive externalities from the MNC's presence exist. Hence in many cases a ban on subsidies may increase welfare. In addition, we show how trade integration affects the prospects for social waste.
Keywords: Subsidy Competition, FDI, Greenfield Investment, Mergers and Acquisitions, Regional Integration, Spillovers
JEL Classification: F15, F21, F23
Suggested Citation: Suggested Citation