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Theoretical and Applied Economics
No. 2 / 2010 (543)

On the Intensity of International Subsidy Competition for FDI

Tomáš HAVRÁNEK
Charles University and Czech National Bank, Prague
Zuzana IRŠOVÁ
Charles University, Prague

Abstract. The objective of this paper is to empirically assess the recently introduced models of subsidy competition based on the classical oligopoly theories. Three crucial scenarios (coordination, weak competition, and fierce competition) are tested employing iteratively re-weighted least squares, fixed effects, and dynamic Blundell-Bond estimator on the data from the World Competitiveness Yearbook. The results suggest that none of the scenarios can be strongly supported – although there is some weak support for cooperation –, and thus that empirical evidence is not in accordance with the tested models. There is no evidence for a significant international competition for FDI. It seems that, however, by means of FDI incentives, governments try to compensate foreign investors for high wages and low productivity of their countries’ labor force.

Keywords: investment incentives, foreign direct investment, panel data, subsidy competition.

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