Asymmetric Oligopoly and Foreign Direct Investment: Implications for Host-Country Tax-Setting

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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.
Original languageEnglish
Pages (from-to)229 - 246
Number of pages18
JournalInternational Economic Journal
Volume26
Issue number2
Early online date13 Oct 2011
DOIs
Publication statusPublished - 2012

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Keywords

  • Firm Heterogeneity
  • Oligopoly
  • Trade
  • FDI
  • Taxation

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