Privatization and policy competition for FDI

Oscar Amerighi, Giuseppe De Feo

Research output: Working paperDiscussion paper

Abstract

In this paper, we provide an explanation of why privatization may attract foreign investors interested in entering a regional market. Privatization turns the formerly-public firm into a less aggressive competitor since profit- maximizing output is lower than the welfare-maximizing one. The drawback is that social welfare generally decreases. We also investigate tax/subsidy competition for FDI before and after privatization. We show that policy competition is irrelevant in the presence of a public firm serving just its domestic market. By contrast, following privatization, it endows the big country with an instrument which can be used either to reduce the negative impact on welfare of an FDI-attracting privatization or to protect the domestic industry from foreign competitors.
LanguageEnglish
Number of pages32
Publication statusPublished - 2008

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Privatization
Competition policy
Public firm
Competitors
Domestic market
Social welfare
Industry
Profit
Tax subsidies
Foreign investors

Keywords

  • foreign direct investment
  • tax competition
  • public firm
  • privatization

Cite this

Amerighi, O., & De Feo, G. (2008). Privatization and policy competition for FDI.
Amerighi, Oscar ; De Feo, Giuseppe. / Privatization and policy competition for FDI. 2008.
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Amerighi, O & De Feo, G 2008 'Privatization and policy competition for FDI'.

Privatization and policy competition for FDI. / Amerighi, Oscar; De Feo, Giuseppe.

2008.

Research output: Working paperDiscussion paper

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AB - In this paper, we provide an explanation of why privatization may attract foreign investors interested in entering a regional market. Privatization turns the formerly-public firm into a less aggressive competitor since profit- maximizing output is lower than the welfare-maximizing one. The drawback is that social welfare generally decreases. We also investigate tax/subsidy competition for FDI before and after privatization. We show that policy competition is irrelevant in the presence of a public firm serving just its domestic market. By contrast, following privatization, it endows the big country with an instrument which can be used either to reduce the negative impact on welfare of an FDI-attracting privatization or to protect the domestic industry from foreign competitors.

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