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Asymmetric Oligopoly and Foreign Direct Investment: Implications for Host-Country Tax-Setting

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  • Lynda A. Porter

Abstract

We present a duopoly model with heterogeneous firms that vary in cost-efficiency, each of which can choose to serve a foreign market by either exporting or local production. We do so to analyse the effects of a host-country corporate profit tax on both the scale and composition of FDI, and find that: strategic interaction between oligopolistic firms provides for a pattern of FDI that favours cost-inefficiency to the detriment of host-country welfare; and the host-country tax rate can be optimally used to avoid such patterns of FDI and instead promote direct investment by a relatively cost-efficient firm.

Suggested Citation

  • Lynda A. Porter, 2012. "Asymmetric Oligopoly and Foreign Direct Investment: Implications for Host-Country Tax-Setting," International Economic Journal, Taylor & Francis Journals, vol. 26(2), pages 229-246, June.
    • Handle: RePEc:taf:intecj:v:26:y:2012:i:2:p:229-246
    DOI: 10.1080/10168737.2011.552515
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