On the efficiency of fiscal competition for FDI when incumbent firms are foreign-owned

We show that the international distribution of ownership of the incumbent firms within a host region matters for the efficiency of the fiscal competition between the region's constituent countries for a new FDI project. If incumbent firms are owned entirely within the host region, then the new plant's location will be efficient. However, when incumbent firms are owned outside the host region and the degree of such extra-regional ownership varies substantially across the competing host countries-as it does in the data-then inefficient locations might win contests for new plants.