Developing countries in competition for foreign investment

05  March 2015    4:00 pm CET

Goran Vukšić, Institute of Public Finance, Croatia

In cooperation with:


wiiw, Rahlgasse 3, 1060 Vienna, lecture hall (entrance from the ground floor)


This study analyzes the competition for foreign direct investment (FDI) among countries at different stages of development. It is assumed that domestic companies in a more-developed country use more capital in production and that wages in a less-developed country are lower. Countries can compete for FDI by increasing the supply of public inputs in the economy, in addition to (or instead of) offering subsidies or tax reliefs to foreign investors. The results reveal that if governments of competing countries are not allowed to discriminate between domestic and foreign firms, there may be situations in which a less-developed economy will attract FDI depending on the labor cost differential and the responsiveness of foreign investors’ and domestic companies’ output to changes in the supply of public inputs. If tax discrimination between domestic and foreign firms is permitted, both countries will optimally raise the supply of public inputs, but the more-developed country will always win the foreign investment despite higher labor costs. Thus, governments of less-developed countries may have an incentive to work on an international agreement to disallow tax discrimination.

Paper and Powerpoint presentation, as far as available, are posted on this page after the seminar.

Keywords: foreign direct investment, economic development, taxation policy, subsidies, public goods

JEL classification: F21, O24, H25, H41