Premium
Foreign direct investment subsidy in a dynamic stochastic general equilibrium model with heterogeneous firms
Author(s) -
Wu YenChen,
Chen Shikuan,
Chang MingJen
Publication year - 2019
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12430
Subject(s) - subsidy , multinational corporation , welfare , foreign direct investment , economics , productivity , consumption (sociology) , international economics , general equilibrium theory , investment (military) , monetary economics , microeconomics , market economy , macroeconomics , finance , social science , sociology , politics , political science , law
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.