English, Article, Journal or magazine article edition: Subsidies for FDI: Implications from a Model with Heterogeneous Firms Davin Chor

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  • preprint
Language
  • English

Edition details

Title
  • Subsidies for FDI: Implications from a Model with Heterogeneous Firms
Author
  • Davin Chor
Physical Description
  • preprint
Notes
  • This paper analyzes the welfare e®ects of subsidies to attract multinational corporations, in a setting where ¯rms 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 costs of funding the subsidy program through a tax on labor income. This welfare gain stems from a selection e®ect, whereby the subsidy induces only the most productive exporters to switch to servicing the host's market via FDI. I further show that the welfare gain from a subsidy to variable costs is larger than from a subsidy to the ¯xed cost of conducting FDI, since a variable cost subsidy also raises the ine±ciently low output levels stemming from each ¯rm's mark-up pricing power.
  • FDI subsidies; heterogeneous firms; fixed versus variable cost subsidies; import subsidies.
  • RePEc:siu:wpaper:04-2007
Language
  • English
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