Is competition for FDI bad for regional welfare?

Oscar Amerighi, Giuseppe De Feo

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We investigate the impact on regional welfare of policy competition for FDI when a multinational firm can strategically react to differences in statutory corporate tax rates and shift taxable profits to lower-tax jurisdictions. We show that competing governments may have an incentive to tax discriminate between domestic and multinational firms even in the presence of profit shifting opportunities for the latter. In particular, tax discrimination leads to higher welfare for the region as a whole than lump-sum subsidy competition when the difference in statutory corporate tax rates and/or their average is high enough. We also find that policy competition increases regional welfare by changing the firm's investment decision when profit shifting motivations might induce the firm to locate in the least profitable country.
Original languageEnglish
Number of pages31
Publication statusPublished - 2008
Event10th Annual Conference of the European Trade Study Group (ETSG2008) - Warsaw, Poland
Duration: 1 Sep 2008 → …


Conference10th Annual Conference of the European Trade Study Group (ETSG2008)
CityWarsaw, Poland
Period1/09/08 → …


  • policy competition
  • FDI
  • profit shifting
  • tax discrimination

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