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

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  • Lynda A. Porter

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.

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File URL: http://hdl.handle.net/10.1080/10168737.2011.552515
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Economic Journal.

Volume (Year): 26 (2012)
Issue (Month): 2 (June)
Pages: 229-246

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Handle: RePEc:taf:intecj:v:26:y:2012:i:2:p:229-246

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Cited by:
  1. Monika Mrázová & J. Peter Neary, 2012. "Selection effects with heterogeneous firms," LSE Research Online Documents on Economics 51521, London School of Economics and Political Science, LSE Library.

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