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Tariff-Jumping Direct Foreign Investment and Optimal Tariffs: A Three-Country Three-Finn Model

Author

Listed:
  • Youngjae Choi

    (Hongik University)

Abstract

With a three-country (one home and two foreign countries) three-firm model, this paper investigates an optimal import tariff set by a home government subject to tariff-jumping direct foreign investment (DFI) by foreign firms. It is shown that, unlike the existing two-country two-firm model, DFI occurs in equilibrium for some parameterizations of cost and demand conditions. We also show that the host country can be better off with the inflow of tariff-jumping DFI than in the benchmark case where the foreign firms are not allowed to conduct DFI and the home government can set an unconstrained optimal tariff.

Suggested Citation

  • Youngjae Choi, 2002. "Tariff-Jumping Direct Foreign Investment and Optimal Tariffs: A Three-Country Three-Finn Model," Korean Economic Review, Korean Economic Association, vol. 18, pages 253-266.
    • Handle: RePEc:kea:keappr:ker-200212-18-2-03
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    More about this item

    Keywords

    Import tariff; direct foreign investment; oligopoly; welfare implications;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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