IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Country risk, country size, and tax competition for foreign direct investment

  • Sanjo, Yasuo
Registered author(s):

    This paper analyzes tax competition for foreign direct investment with country risk using a two-country model with different market sizes. We show that the trade-off between country size as a locational advantage and country risk as a locational disadvantage affects the location choice of a foreign firm. Given the circumstance in which the foreign firm faces the same probabilities of country risk in both potential host countries when deciding investment location, our analysis shows that if the market size of the high-risk country is sufficiently large relative to the low-risk country, the foreign firm benefits from choosing the high-risk larger country even if the host country's government imposes a lump-sum tax. Given the situation in which the foreign firm faces different probabilities of country risk in each host country, our results show that the important matter for the foreign firm is whether the host country is high-cost or low-cost, rather than whether the host country is high-risk.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal International Review of Economics & Finance.

    Volume (Year): 21 (2012)
    Issue (Month): 1 ()
    Pages: 292-301

    in new window

    Handle: RePEc:eee:reveco:v:21:y:2012:i:1:p:292-301
    Contact details of provider: Web page:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Kai Carstensen & Farid Toubal, 2004. "Foreign Direct Investment in Central and Eastern European Countries: A Dynamic Panel Analysis," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00311585, HAL.
    2. Müller, Thomas & Schnitzer, Monika, 2006. "Technology transfer and spillovers in international joint ventures," Munich Reprints in Economics 19198, University of Munich, Department of Economics.
    3. Bevan, Alan A. & Estrin, Saul, 2004. "The determinants of foreign direct investment into European transition economies," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 775-787, December.
    4. Hubert Janicki & Phanindra Wunnava, 2004. "Determinants of foreign direct investment: empirical evidence from EU accession candidates," Applied Economics, Taylor & Francis Journals, vol. 36(5), pages 505-509.
    5. Haufler, Andreas & Wooton, Ian, 2006. "The effects of regional tax and subsidy coordination on foreign direct investment," European Economic Review, Elsevier, vol. 50(2), pages 285-305, February.
    6. Broll, Udo & Zilcha, Itzhak, 1992. "Exchange rate uncertainty, futures markets and the multinational firm," European Economic Review, Elsevier, vol. 36(4), pages 815-826, May.
    7. Thomas, J. & Worral, T., 1991. "Foreign Direcyt Investment and the Risk of Expropriation," Papers 9126, Tilburg - Center for Economic Research.
    8. Dean Yang, 2006. "Coping with Disaster: The Impact of Hurricanes on International Financial Flows, 1970-2002," NBER Working Papers 12794, National Bureau of Economic Research, Inc.
    9. Elizabeth Asiedu & Yi Jin & Boaz Nandwa, 2009. "Does Foreign Aid Mitigate the Adverse Effect of Expropriation Risk on Foreign Direct Investment?," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200905, University of Kansas, Department of Economics.
    10. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
    11. Schnitzer, Monika, 1999. "Expropriation and control rights: A dynamic model of foreign direct investment," Munich Reprints in Economics 19890, University of Munich, Department of Economics.
    12. Bjorvatn, Kjetil & Eckel, Carsten, 2006. "Policy competition for foreign direct investment between asymmetric countries," European Economic Review, Elsevier, vol. 50(7), pages 1891-1907, October.
    13. 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.
    14. Holger Görg & Hassan Molana & Catia Montagna, 2007. "Foreign Direct Investment, Tax Competition and Social Expenditure," Dundee Discussion Papers in Economics 198, Economic Studies, University of Dundee.
    15. Barros, Pedro P & Cabral, Luis, 2000. "Competing for Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 360-71, May.
    16. Joshua Aizenman & Nancy Marion, 2001. "The Merits of Horizontal versus Vertical FDI in the Presence of Uncertainty," NBER Working Papers 8631, National Bureau of Economic Research, Inc.
    17. C. Dembour, 2008. "Competition for Business Location: A Survey," Journal of Industry, Competition and Trade, Springer, vol. 8(2), pages 89-111, June.
    18. Fosfuri, Andrea, 2004. "Determinants of international activity: evidence from the chemical processing industry," Research Policy, Elsevier, vol. 33(10), pages 1599-1614, December.
    19. Elizabeth Asiedu & Hadi Salehi Esfahani, 2001. "Ownership Structure In Foreign Direct Investment Projects," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 647-662, November.
    20. Ferdinand Mittermaier, 2009. "The Role of Firm Ownership in Tax Competition," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(3), pages 297-312, September.
    21. Anthony Mancuso & Cassandra Dirienzo & Jayoti Das, 2010. "Assessing terrorist risk and FDI using relative information measures," Applied Economics Letters, Taylor & Francis Journals, vol. 17(8), pages 787-790.
    22. Raff, Horst & Srinivasan, Krishna, 1998. "Tax incentives for import-substituting foreign investment:: Does signaling play a role?," Journal of Public Economics, Elsevier, vol. 67(2), pages 167-193, February.
    23. Rui Albuquerque, 2004. "The Composition of International Capital Flows: Risk Sharing Through Foreign Direct Investment," International Finance 0405004, EconWPA.
    24. Fumagalli, Chiara, 2003. "On the welfare effects of competition for foreign direct investments," European Economic Review, Elsevier, vol. 47(6), pages 963-983, December.
    25. Chakrabarti, Avik, 2003. "A theory of the spatial distribution of foreign direct investment," International Review of Economics & Finance, Elsevier, vol. 12(2), pages 149-169.
    26. Al-Saadon, Yousef & Das, Satya P., 1996. "Host-country policy, transfer pricing and ownership distribution in international joint ventures: A theoretical analysis," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 345-364, May.
    27. Zhong, Litao & Lahiri, Sajal, 2009. "International joint ventures and tax competition in an integrated market," International Review of Economics & Finance, Elsevier, vol. 18(1), pages 38-44, January.
    28. Abadie, Alberto & Gardeazabal, Javier, 2008. "Terrorism and the world economy," European Economic Review, Elsevier, vol. 52(1), pages 1-27, January.
    29. Lee, Tan, 2004. "Determinants of the foreign equity share of international joint ventures," Journal of Economic Dynamics and Control, Elsevier, vol. 28(11), pages 2261-2275, October.
    30. Isabel Faeth, 2009. "Determinants Of Foreign Direct Investment - A Tale Of Nine Theoretical Models," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 165-196, 02.
    31. Marjit, Sugata & Broll, Udo & Mallick, Indrajit, 1995. "A theory of overseas joint ventures," Economics Letters, Elsevier, vol. 47(3-4), pages 367-370, March.
    32. Stephane Straub, 2005. "Opportunism, Corruption and the Multinational Firm's Mode of Entry," ESE Discussion Papers 102, Edinburgh School of Economics, University of Edinburgh.
    33. Hao, Qian & Lahiri, Sajal, 2009. "Competition for foreign direct investment: The role of technology and market structure," International Review of Economics & Finance, Elsevier, vol. 18(4), pages 680-690, October.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:21:y:2012:i:1:p:292-301. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.