Foreign Direct Investment Subsidy
43 Pages Posted: 11 Apr 2014
Date Written: April 9, 2014
We address the problem of optimal form and timing of FDI subsidy, and the impact of competition on these. We find that the optimal subsidy must include an element of discouragement against delaying the timing of the investment for the firm to prevent the firm from extracting rent from the host country. The optimal timing depends on factors related to the industry where the investment is made, and factors related to the welfare effects of the investment as well as the market for subsidy. These results generate empirical predictions as the subsidy we are the most likely to see is the subsidy that speeds up the investment the most. The factors influencing subsidy are the welfare effects relative to the amortised investment cost and the strategic commitment value of investment and subsidy.
Keywords: Foreign direct investment, Subsidy, Strategic commitment
JEL Classification: D92, E62, G31, H21
Suggested Citation: Suggested Citation