Benefits of FDI Subsidies: The Role of Funding Sources

41 Pages Posted: 9 Nov 2020

See all articles by Wontae Han

Wontae Han

The Chinese University of Hong Kong, Shenzhen

Jian Wang

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Xiao Wang

University of Science and Technology of China

Date Written: August 15, 2020

Abstract

Using a two-country model with heterogeneous firms, we show that the optimal level and welfare gains of foreign direct investment (FDI) subsidies critically depend on how they are funded. In a setting that resembles common tax distortions in emerging markets, we compare the effects of distortionary taxes that are imposed to fund FDI subsidies and examine their cross-country spillovers. Our model predicts that the optimal level of FDI subsidies and the associated welfare gains are much lower than those for non-distortionary taxes. FDI subsidies funded by distortionary taxes are also found to be beggar-thy-neighbor, although they generate positive cross-country welfare spillovers if funded by non-distortionary labor income taxes.

Keywords: Foreign direct investment, FDI subsidies, tax distortions, emerging markets

JEL Classification: F13, F23, F42, E62

Suggested Citation

Han, Wontae and Wang, Jian and Wang, Xiao, Benefits of FDI Subsidies: The Role of Funding Sources (August 15, 2020). Available at SSRN: https://ssrn.com/abstract=3693786 or http://dx.doi.org/10.2139/ssrn.3693786

Wontae Han

The Chinese University of Hong Kong, Shenzhen ( email )

CUHK-SZ, 2001 Longxiang Avenue
Shenzhen, Guangdong 518172
China

HOME PAGE: http://https://sites.google.com/site/econhanwt/

Jian Wang

The Chinese University of Hong Kong, Shenzhen ( email )

HOME PAGE: http://jianwang.weebly.com

Shenzhen Finance Institute ( email )

Xiao Wang (Contact Author)

University of Science and Technology of China ( email )

China

HOME PAGE: http://https://sites.google.com/site/xiaowangeconomics/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
27
Abstract Views
240
PlumX Metrics