FDI Selection: Crowding Out and Distributional Effects

Abstract

Oligopolists from two source countries invest in a common host country to take advantage of low costs. A selective subsidy to multinational production encourages foreign direct investment (FDI) from the favored country but crowds out FDI from the other source. Such a subsidy also shifts rents across firms and alters wages. The source country with less natural tendency to conduct FDI in the host country receives the larger subsidy (or smaller tax). The source country receiving the smaller subsidy (or larger tax) loses relative to nonintervention but gains from a nondiscrimination clause requiring the host country to apply FDI policy equally across all firms.