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Tax competition with asymmetric market structures: The role of policy instruments

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  • Qian Hao
  • Sajal Lahiri

Abstract

We analyze the location choice of a multinational corporation (MNC) between two host countries with different market structures, i.e. the number of competing domestic firms in them. We consider the effects of import tariffs and lump-sum subsidies on the MNC's locational choice. Our findings include: (1) with lump-sum subsidy, the country with fewer firms always gets the MNC, (2) with tariffs, the country with more domestic firms gets the MNC when the export transportation cost is high and the domestic firms are sufficiently inefficient, while the country with fewer domestic firms wins the MNC when export transportation cost is low, and (3) the MNC location decision may crucially depend on which instrument is used to attract the MNC.

Suggested Citation

  • Qian Hao & Sajal Lahiri, 2012. "Tax competition with asymmetric market structures: The role of policy instruments," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 21(5), pages 691-704, October.
    • Handle: RePEc:taf:jitecd:v:21:y:2012:i:5:p:691-704
    DOI: 10.1080/09638199.2010.533280
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    1. Theodore H. Moran, 1998. "Foreign Direct Investment and Development: The New Policy Agenda for Developing Countries and Economies in Transition," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 53.
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