Competing for Foreign Direct Investment Through Investment in Public Infrastructure

In the first essay we examine optimal investment in public infrastructure when used to attract foreign direct investment (FDI). We model a monopolistic multinational firm that wants to establish its production plant in one of two prospective host countries with segmented markets, hence there is no arbitrage between the markets. Preceding the firm's location decision, the government of one of the prospective host countries invests in public infrastructure, while the other prospective host government is policy inactive. We identify country characteristics that make a government more likely to use investment in public infrastructure to attract FDI. We find that countries with a large market size, low social cost of public funds, large direct social benefits and high effectiveness of public infrastructure are most likely to be successful in attracting FDI into their jurisdiction by investing in public infrastructure. We also examine the effect of trade liberalisation between the two markets on optimal investment in public infrastructure. We find that a non-monotonic relationship exists between trade costs and optimal investment in public infrastructure. In the second essay we use a similar set-up as in the first essay. However, we now explicitly introduce domestic firms into the model. Simultaneously to the MNE's location decision, these firms, also benefiting from the investment in public infrastructure, decide whether to remain producers for the domestic market only or to become exporters instead. We show that, under certain conditions, a government that invests in public infrastructure to attract foreign direct investment through manipulation, may at the same time turn its domestic firms into exporters. The third essay models a competition - for - FDI game between governments that use different policy instruments: one government invests in public infrastructure, while the other uses its corporate tax rate to entice foreign firms. We model a monopolistic multinational firm, considering to set up a plant in one of two prospective host countries with segmented markets. Governments set policies before the multinational chooses its production location. Also, the government that invests in public infrastructure determines its policy prior to the other government setting its corporate tax rate. When governments compete, there is likely to be a \race to the bottom" in taxes and a \race to the top" in public infrastructure investment. In the final essay we set up a two-stage game in which two governments, competing for FDI, both invest in public infrastructure and set corporate tax rates. We investigate how public infrastructural investment affects tax competition. We assume that investment in public infrastructure by one country may generate spillovers - positive or negative - for the other country. When the infrastructure investment implies significantly negative spillovers for competing host countries, the investing government will strategically under-invest to ease tax competition, while it will strategically over-invest when the spillovers are negative but small or when these are positive. We also examine how two different forms of tax harmonisation affect investment in public infrastructure. Tax harmonisation in the form of a minimum tax can eliminate strategic investment in public infrastructure. While tax harmonisation in the form of a cooperative tax will result in higher taxes. Furthermore, the level of investment in public infrastructure will also be higher.

Name dc:type.qualificationname

phd

Level dc:type.qualificationlevel

doctoral

Grantor dc:publisher.institution

National University of Ireland Maynooth

Year dc:date.issued

2014

Author dc:creator

• Hynes, Kate

• Economics, Finance & Accounting

Language dc:language

en