Foreign direct investment subsidy in a dynamic stochastic general equilibrium model with heterogeneous firms. Issue 5 (18th August 2019)

• Record Type: Journal Article
• Authors: Wu, Yen‐Chen; Chen, Shikuan; Chang, Ming‐Jen
• Is Part Of: Review of international economics. Volume 27:Issue 5(2019)
• Page Start: 1427
• Page End: 1459
• Publication Date: 2019-08-18
• Subjects: International economic relations -- Periodicals; International finance -- Periodicals; Economic policy -- Periodicals; 330
• DOI: 10.1111/roie.12430
• Languages: English
• ISSNs: 0965-7576

Abstract

Abstract: This study analyzes the macroeconomic impacts of subsidies to attract multinational corporations when firms are determining whether to enter or how to serve foreign markets. We show that a small FDI subsidy scheme induces consumption gains and delivers short‐term welfare improvement for the FDI host country if firms differ in productivity. However, the subsidy generates a new problem and results in the wealth reallocation effect, leading to welfare deterioration for the host country in the long run. Moreover, we find that a subsidy program induces a welfare improvement for the host country if it is offered to all domestic producers instead of foreign producers only in the host country.