Foreign Monopoly and Tax Holidays
AbstractHost country governments often grant tax holidays to foreign firms located 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 procompetitive 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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Bibliographic InfoPaper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0416.
Date of creation: Nov 2004
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-12-02 (All new papers)
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