On the FDI: attracting property of privatization

Abstract

In the present paper we provide an explanation of why privatization may attract foreign investors willing to enter a regional market. Privatization turns the formerly-public rm into a less aggressive competitor since pro t-maximizing output is lower than the welfare-maximizing 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 FDIattracting privatization. On the other hand, it may prevent a welfare-reducing investment by the foreign rm. This shows that privatization and scal policies may be either alternative or complementary instruments depending on the government's objective (i.e., country's attractiveness for foreign investors and domestic welfare).