On the FDI-Attracting Property of Privatization

Amerighi, Oscar and De Feo, Giuseppe (2010) On the FDI-Attracting Property of Privatization. Discussion paper. University of Strathclyde, Glasgow.

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    Abstract

    In this paper, we provide an explanation of why privatization may attract foreign investors willing to enter a regional market. Privatization turns the formerly-public firm into a less aggressive competitor since profit-maximizing output is lower than the welfaremaximizing one. The drawback is that social welfare generally decreases. We also investigate tax/subsidy competition for FDI and put forward its potentially positive role. On the one hand, it may reduce the negative impact on welfare of an FDI-attracting privatization. On the other hand, it may prevent a welfare-reducing investment by the foreign firm. This sheds light on the substitute/complementary relationship between the two policies and the two objectives of governments.