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Regional Competition for Foreign Direct Investment: The Role of Multi-Level Government and Imperfect Commitment


Countries or regions increasingly use a variety of incentives, such as tax breaks, provision of infrastructure, direct payments, and others, to attract foreign direct investment (FDI). Such state aids for FDI in disadvantaged regions can be appropriate pol icy instruments for achieving cohesion within the European Union. On the other hand, inter-regional competition for FDI transfers resources from taxpayers to multi-national firms. Therefore, while FDI increase competitiveness and productivity of a region, the costly competition to attract such investments poses important challenges to the European welfare state.The project wants to understand better the nature of such inter-governmental competition for FDI and deduct the normative implications. In particula r, how does the interaction of different layers of government affect the nature of this competition? How does imperfect commitment power of governments or firms affect it? And how do these aspects interact?Some countries possess a rather unitary structure, whereas other may exhibit a federal structure with various tiers of government. For inter-regional competition for FDI this opens the possibility that regions will be competing with other regions within the same federation, with regions from other federal states, or directly with a unitary state. These differences will affect the nature of competition for FDI in a number of ways and also affect the welfare conclusions regarding state aids.Furthermore in the context of FDI, governments as well as investing firms face commitment problems. The project addresses the interaction of these problems with the governmental structures of the regions engaged in the competition for FDI and asks, how the structure of governments can aggravate or help to resolve such com mitment problems.

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