Foreign Monopoly and Tax Holidays
Host country governments often grant tax holidays to foreign firms located in their territories. Although such preferential tax treatment appears to disadvantage local competitors who try to enter the new markets, tax holidays can actually facilitate entry by local firms. This procompetitive effect stems from the fact that tax holidays are granted for a limited time. By making the foreign firm appear temporarily "tough," tax holidays induce local firms to delay entry, which in turn prompts the foreign firm to accommodate entry rather than pursue costly entry-deterring strategies. Thus, tax holidays benefit both the foreign firms and local entrepreneurs.
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- Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
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