English, Article edition: Subsidies for FDI: Implications from a model with heterogeneous firms Chor, Davin

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  • article
Language
  • English

Edition details

Title
  • Subsidies for FDI: Implications from a model with heterogeneous firms
Author
  • Chor, Davin
Physical Description
  • article
Notes
  • This paper analyzes the welfare effects of subsidies to attract multinational corporations when firms are heterogeneous in their productivity levels. I show that the use of a small subsidy raises welfare in the FDI host country, with the consumption gains from attracting more multinationals exceeding the direct cost of funding the subsidy program through a tax on labor income. This welfare gain stems from a selection effect, whereby the subsidy induces only the most productive exporters to switch to servicing the host's market via FDI. I further show that for the same total subsidy bill, a subsidy to variable costs delivers a larger welfare gain than a subsidy to the fixed cost of conducting FDI, since a variable cost subsidy also raises the inefficiently low output levels stemming from each firm's markup pricing power.
  • FDI subsidies Heterogeneous firms Fixed versus variable cost subsidies Import subsidies
  • RePEc:eee:inecon:v:78:y:2009:i:1:p:113-125
Language
  • English
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