Open Access
State Aid to Attract FDI and the European Competition Policy: Should Variable Cost Aid Be Banned?
Loading...
License
Access Rights
Cadmus Permanent Link
Full-text via DOI
ISBN
ISSN
1725-6704
Issue Date
Type of Publication
LC Subject Heading
Other Topic(s)
EUI Research Cluster(s)
Initial version
Published version
Succeeding version
Preceding version
Published version part
Earlier different version
Initial format
Author(s)
Citation
EUI ECO; 2006/41
Cite
MARINIELLO, Mario, State Aid to Attract FDI and the European Competition Policy: Should Variable Cost Aid Be Banned?, EUI ECO, 2006/41 - https://hdl.handle.net/1814/6686
Abstract
The purpose of this paper is to analyze the European Commission's approach to state
aid for foreign direct investment in a competition policy framework. The Commission
shows to consider variable cost aid (VCA) to be more distortive than start-up or fixed
cost aid (FCA). This paper addresses that issue and checks whether allowing FCA while
banning VCA is a
first-best strategy for a rational Authority maximizing welfare.
The model shows that a rational forward-looking government maximizing domestic
welfare always prefers VCA to FCA if both the incumbent and the entrant are foreign firms and if granting VCA does not cause to the incumbent
firm to exit the market. On
the other hand, a VCA which causes the incumbent
firm to be crowded out by the entrant
never occurs at the equilibrium.
The model shows that the Commission's approach may lead to sub-optimal equilibria
where market competition and consumers' welfare are not maximized.