Abstract
We present a duopoly model with heterogeneous firms that vary in
cost-efficiency, each of which can choose to serve a foreign market by either exporting or local production. We do so to analyse the effects of a host-country corporate profit tax on both the scale and composition of FDI, and find that: strategic interaction between oligopolistic firms provides for a pattern of FDI that favours cost-inefficiency to the detriment of host-country
welfare; and the host-country tax rate can be optimally used to avoid such patterns of FDI and instead promote direct investment by a relatively cost-efficient firm.
cost-efficiency, each of which can choose to serve a foreign market by either exporting or local production. We do so to analyse the effects of a host-country corporate profit tax on both the scale and composition of FDI, and find that: strategic interaction between oligopolistic firms provides for a pattern of FDI that favours cost-inefficiency to the detriment of host-country
welfare; and the host-country tax rate can be optimally used to avoid such patterns of FDI and instead promote direct investment by a relatively cost-efficient firm.
| Original language | English |
|---|---|
| Pages (from-to) | 229 - 246 |
| Number of pages | 18 |
| Journal | International Economic Journal |
| Volume | 26 |
| Issue number | 2 |
| Early online date | 13 Oct 2011 |
| DOIs | |
| Publication status | Published - 2012 |
Keywords
- Firm Heterogeneity
- Oligopoly
- Trade
- FDI
- Taxation
