Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/75986 
Authors: 
Year of Publication: 
2002
Series/Report no.: 
CESifo Working Paper No. 763
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper examines how free-trade agreements and customs unions affect the location of foreign direct investment (FDI) and social welfare, taking into account that governments may adjust taxes and external tariffs to compete for FDI. Conditions are identified under which a free-trade agreement leads to FDI and under which this improves welfare. The welfare effect is shown to depend on the relative size of efficiency gains in production and government revenue losses due to tax competition. A free-trade agreement may fail to induce welfare-improving FDI, creating a role for a customs union.
Subjects: 
preferential trade agreements
tax competition
multinational enterprises
Document Type: 
Working Paper
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