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Countries compete for new FDI investment, whereas stocks of FDI
generate agglomeration benefits and are potentially subject to
extortionary taxation. We study the interaction between these
aspects in a simple vintage capital framework with discrete time and
infinite horizon, focussing on Markov perfect equilibrium in
stationary strategies. We show that the tax revenue in the
equilibrium is substantial, and higher on “old" FDI than on "new"
FDI, even though countries are not allowed to use discriminatory
taxation. Moreover, the agglomeration advantage is valuable, but is
exploited in the short run and can be unstable over time. |
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