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Incentives to Create Jobs: Regional Subsidies, National Trade Policy and Foreign Direct Investment

Régibeau, P and Rockett, K and Adams, L (2012) Incentives to Create Jobs: Regional Subsidies, National Trade Policy and Foreign Direct Investment. Working Paper. University of Essex, Department of Economics, Economics Discussion Papers 710.

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Abstract

A national authority wishes to attract foreign direct investment (FDI) to create local jobs. We analyse the optimal national trade policy faced with the possibility that local authorities might offer subsidies to convince a multi-national enterprise (MNE) to invest in their jurisdiction. With centralised decision-making or with allocation of investment to particular localities, the central authority's optimal policy is to use a high tariff to avoid payment of any subsidy to the MNE. Despite this, some socially undesirable (but locally desirable) FDI cannot be avoided. If local authorities compete to offer subsidies to attract local investment, then the central government's optimal policy is to try to discourage FDI by choosing a low tariff. Again, despite this some socially undesirable - and even locally undesirable - FDI prevails. We conduct our analysis both assuming an upper bound on tariffs, as would be consistent with trade liberalisation, and allowing tariffs to vary freely. The effect of this trade liberalisation depends heavily on the system of granting local subsidies: if the system is rather centralised, trade liberalisation decreases the range of parameters for which FDI occurs; if the system is decentralised and competitive, it increases this range.

Item Type: Monograph (Working Paper)
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 11 Jul 2012 15:35
Last Modified: 12 Apr 2018 15:15
URI: http://repository.essex.ac.uk/id/eprint/2862

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