State Aid to Attract FDI and the European Competition Policy: Should Variable Cost Aid Be Banned?

摘要

The purpose of this paper is to analyze the European Commission's approach to stateaid for foreign direct investment in a competition policy framework. The Commissionshows to consider variable cost aid (VCA) to be more distortive than start-up or fixedcost aid (FCA). This paper addresses that issue and checks whether allowing FCA whilebanning VCA is a …first-best strategy for a rational Authority maximizing welfare.The model shows that a rational forward-looking government maximizing domesticwelfare 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. Onthe other hand, a VCA which causes the incumbent …firm to be crowded out by the entrantnever occurs at the equilibrium.The model shows that the Commission's approach may lead to sub-optimal equilibriawhere market competition and consumers' welfare are not maximized.