Subsidizing industrial location : a conceptual framework with application to Korea
Murray, Michael P.
How can policymakers in developing countries best induce firms to locate at particular sites? To glean answers to this question, the author develops the first rigorous conceptual framework for analyzing the economic efficiency of alternative policies to influence firms' choices of location. The framework is rooted in a theory of optimal subsidies and relies on econometric and simulation models of firms' costs. The econometric model is estimated with data from a census of manufacturing and from a recent, comprehensive World Bank study of industrial location policies, both made in the Republic of Korea. These estimates serve as the basis for a simulation model that is used to examine the various subsidies that constitute location policies. The simulation model is used with the Korean data to analyze these subsidies - which include loan guarantees, reductions in land prices, public investments such as better roads, and tax breaks. The simulations allow the author to evaluate the benefits and costs of the subsidies and to discuss their relative efficiencies.
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