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Foreign Monopoly and Tax Holidays

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  • Kaz Miyagiwa

    ()

  • Yuka Ohno

Abstract

Host country governments often grant tax holidays to foreign firms locating in their territories. Although such preferential tax treatment appears to disadvantage local competitors who try to enter the new markets, tax holidays can actually facilitate entry by local firms. This pro-competitive effect stems from the fact that tax holidays are granted for a limited time. By making the foreign firm appear temporarily “tough”, tax holidays induce local firms to delay entry, which in turn prompts the foreign firm to accommodate entry rather than pursue costly entry-deterring strategies. Thus, tax holidays benefit both the foreign firms and local entrepreneurs.

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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0416.

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Date of creation: Nov 2004
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Handle: RePEc:emo:wp2003:0416

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  1. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
  2. Judith R. Gelman & Steven C. Salop, 1983. "Judo Economics: Capacity Limitation and Coupon Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 315-325, Autumn.
  3. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.
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