International Rivalry in FDI Incentives and Strategic Responses

As globalization continues to expand since the 1990s, competition for foreign direct investment (FDI) has intensified all over the world. This study employed a game-theoretical model which is composed of three stages, where governments of potential host countries set their policies to attract MNCs and impose a tariff on imported products, and MNCs make their own locational decision after realizing policy sets of incentives and tariffs. With the game-theoretical model, this paper tried to explore strategic relationships among developing countries in a race to attract multinational corporations (MNCs).

Some of the most notable findings from this study is that the host country has no first-mover advantage in a race of FDI subsidies because it needs to provide a greater subsidy to attract the MNC when it moves first by providing FDI subsidies. Then, the non-host country will react by imposing a tariff against the exports of the host country to the market of the non-host country.