Coordinating FDI Policies Among Host Countries

We study competition for foreign direct investment (FDI) between host coun-tries versus policy coordination. By reducing its tax on multinational production, a host country can attract additional FDI, some of which is diverted from other host countries. The shift in FDI causes host wages to rise while wages elsewhere fall. The host country with the smaller labor supply per Þrm, and hence the lower natural attractiveness for FDI absent intervention, adopts a smaller tax on multinational production. The host countries can implement larger taxes by coordinating their policies to eliminate the FDI diversion effect