International Competition for Multinational Investment

We examine the economic justification for providing investment subsidies to foreign-owned\nmultinationals. These provide employment opportunities and generate demand for domestic\nintermediate inputs, produced by domestic workers with increasing returns to scale. Offering\nsubsidies to multinationals may be in the national interest if the investment raises the net\nvalue of domestic production. When agglomerative forces are sufficiently strong, a subsidy\nthat attracts the first foreign firm may induce several to enter, establishing a thriving modern\nsector. With a limited number of foreign enterprises, countries may compete to attract investment. This subsidy competition transfers much of the rents to the multinationals.