International competition for multinational investment

We examine the economic justification for providing investment subsidies to foreign-owned multinationals. These provide employment opportunities and g enerate demand for domestic intermediate inputs, produced by domestic worke rs with increasing returns to scale. Offering subsidies to multinationals m ay be in the national interest if the investment raises the net value of do mestic production. When agglomerative forces are sufficiently strong, a sub sidy that attracts the first foreign firm may induce several to enter, esta blishing a thriving modern sector. With a limited number of foreign enterpr ises, countries may compete to attract investment. This subsidy competition transfers much of the rents to the multinationals.