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FDI, trade costs and regional asymmetries

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  • Julia Darby

    ()
    (Department of Economics, University of strathclyde)

  • Ben Ferrett

    ()
    (Loughborough University)

  • Ian Wooton

    ()
    (Department of Economics, University of Strathclyde)

Abstract

We set up a trade model where three countries compete for an exogenous number of firms. Our innovation lies in the geography of the model. Of the three countries, one is the hub through which all trade takes place. First, we establish the natural geography of the region, which is given by the equilibrium distribution of industrial activity in the absence of taxes or subsidies. We then examine the implications for corporate taxes when the countries compete with each other to attract firms. We find that, even when all countries are the same size, the centrality of the hub gives it an advantage in tax setting, such that its equilibrium tax can be larger than that of the spokes and yet it still attracts a disproportionate share of industry. Thus geographic advantage in tax competition has a second dimension, centrality in addition to size.

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Bibliographic Info

Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 1327.

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Length: 24 pages
Date of creation: Nov 2013
Date of revision:
Publication status: Published
Handle: RePEc:str:wpaper:1327

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Keywords: Corporate taxes; devolution; trade costs;

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  1. Brander, James & Krugman, Paul, 1983. "A 'reciprocal dumping' model of international trade," Journal of International Economics, Elsevier, vol. 15(3-4), pages 313-321, November.
  2. Johannes Becker & Clemens Fuest, 2009. "EU Regional Policy and Tax Competition," Working Papers 0902, Oxford University Centre for Business Taxation.
  3. Bjorvatn, Kjetil & Eckel, Carsten, 2006. "Policy competition for foreign direct investment between asymmetric countries," Munich Reprints in Economics 20270, University of Munich, Department of Economics.
  4. Haufler, Andreas & Wooton, Ian, 2010. "Competition for firms in an oligopolistic industry: The impact of economic integration," Journal of International Economics, Elsevier, vol. 80(2), pages 239-248, March.
  5. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
  6. Olsen, Trond E. & Osmundsen, Petter, 2003. "Spillovers and international competition for investments," Journal of International Economics, Elsevier, vol. 59(1), pages 211-238, January.
  7. Haufler, Andreas & Wooton, Ian, 2006. "The effects of regional tax and subsidy coordination on foreign direct investment," Munich Reprints in Economics 19926, University of Munich, Department of Economics.
  8. Fumagalli, Chiara, 2003. "On the welfare effects of competition for foreign direct investments," European Economic Review, Elsevier, vol. 47(6), pages 963-983, December.
  9. Haaparanta, Pertti, 1996. "Competition for foreign direct investments," Journal of Public Economics, Elsevier, vol. 63(1), pages 141-153, December.
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