Preferential Trade Agreements and Tax Competition for Foreign Direct Investment

29 Pages Posted: 31 Oct 2002

See all articles by Horst Raff

Horst Raff

Christian-Albrechts-Universitaet zu Kiel; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 2002

Abstract

This paper examines how free-trade agreements and customs unions affect the location of foreign direct investment (FDI) and social welfare, taking into account that governments may adjust taxes and external tariffs to compete for FDI. Conditions are identified under which a free-trade agreement leads to FDI and under which this improves welfare. The welfare effect is shown to depend on the relative size of efficiency gains in production and government revenue losses due to tax competition. A free-trade agreement may fail to induce welfare-improving FDI, creating a role for a customs union.

Keywords: Preferential Trade Agreements, Tax Competition, Multinational Enterprises

JEL Classification: H25, F13, F23

Suggested Citation

Raff, Horst, Preferential Trade Agreements and Tax Competition for Foreign Direct Investment (August 2002). Available at SSRN: https://ssrn.com/abstract=343561 or http://dx.doi.org/10.2139/ssrn.343561

Horst Raff (Contact Author)

Christian-Albrechts-Universitaet zu Kiel ( email )

Institut fur Volkswirtschaftslehre
Wilhelm-Seelig-Platz 1
Kiel, 24098
Germany
+49-431-880-1582 (Phone)
+49-431-880-3150 (Fax)

HOME PAGE: http://www.wiso.uni-kiel.de/vwlinstitute/Raff/?page=raff

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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