Subsidy Competition and the Relocation Choice of MNCs∗

Regional integration makes relocation a more attractive option for MNCs, influencing in turn the provision of investment incentives by member coun-tries. We examine in this context whether subsidy competition increases as integration proceeds. To do so, we model the strategic interaction between two governments offering subsidies and an MNC facing different location al-ternatives. Our welfare analysis shows that the combination of integration and subsidy competition may lead to an excess of subsidization. We also discuss how the desirability of harmonizing subsidies and the net gains from integration crucially depend on technological differences, ownership, and on corporate tax rates. Lastly, we find that the gain from supranational subsidy coordination increases with integration