Locational Competition and Government Intervention


Up to this point, foreign direct investment and the decision to engage in international production have been reviewed exclusively from the firm’s point of view. Even the general considerations of locational factors, which are the domain of the nation-states or — more specifically — their respective governments, have not led to an examination of how government intervention affects both market imperfections as well as FDI flows. Since this issue goes to the heart of the analysis of FDI policy competition, in this intervening part of the chapter a reassessment of the locational dimension is undertaken, which examines the underlying — and potentially conflictual — relationship between firms’ objectives and governments’ interests. In that context, first the neoclassical approach to locational competition is reviewed, followed by an analysis of its implications and shortcomings, which leads to the proposition of an expanded model of FDI policy competition in the final part of this section.


Foreign Direct Investment Transfer Price Market Imperfection International Firm Locational Competition 
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    The idea of competition between jurisdictions goes back to TIEBOUT (1956) who presents an inter-jurisdictional model of rivalry between local governments based on cost related to tax and other public expenditures. In his model it is the consumers who are thought to be perfectly mobile, that “vote with their feet” in their choices of local residence and government.Google Scholar
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