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Strategic Production Subsidy/Tax under Mutual Endogenous Entry of Foreign Firms

Author

Listed:
  • Keisaku Higashida

    () (School of Economics, Kwansei Gakuin University)

  • Hiroaki Ino

    () (School of Economics, Kwansei Gakuin University)

Abstract

Considering a subsidy/tax on domestic production, this study examines the tax competition between two symmetric countries in the presence of the mutual endogenous entry of foreign ï¬ rms into each country’s market through exports and foreign direct investment (FDI). In the absence of FDI, we ï¬ nd that whether the equilibrium tax rate is positive or negative is determined by the export intensity of domestic ï¬ rms and thus the tax rate is always negative (i.e., a subsidy) in the symmetric interior case. However, in the presence of FDI, the necessary and sufficient condition for the sign of the equilibrium tax rate is weighted toward FDI (but still characterized by an observable indicator); hence, the tax rate can plausibly be positive (i.e., a tax). We also show that from the perspective of global welfare, the equilibrium tax rate is excessively low (high) if and only if it is a subsidy (tax).

Suggested Citation

  • Keisaku Higashida & Hiroaki Ino, 2019. "Strategic Production Subsidy/Tax under Mutual Endogenous Entry of Foreign Firms," Discussion Paper Series 201, School of Economics, Kwansei Gakuin University.
  • Handle: RePEc:kgu:wpaper:201
    as

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    References listed on IDEAS

    as
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    3. Lahiri, Sajal & Ono, Yoshiyasu, 1998. "Foreign Direct Investment, Local Content Requirement, and Profit Taxation," Economic Journal, Royal Economic Society, vol. 108(447), pages 444-457, March.
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    5. Hiroaki Ino & Akira Miyaoka, 2016. "Government-induced Production Commitment in the Open Economy," Discussion Paper Series 142, School of Economics, Kwansei Gakuin University, revised May 2016.
    6. Lahiri, S. & Ono, Y., 1998. "Export-Oriented Foreign Direct Investment and Local Content Requirement," ISER Discussion Paper 0456, Institute of Social and Economic Research, Osaka University.
    7. Hiroaki Ino & Toshihiro Matsumura, 2012. "How Many Firms Should Be Leaders? Beneficial Concentration Revisited," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1323-1340, November.
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    9. James Markusen & Frank Stähler, 2011. "Endogenous market structure and foreign market entry," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 147(2), pages 195-215, June.
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    More about this item

    Keywords

    Cournot competition; strategic trade policy; free trade agreement; rapid foreign penetration; protectionism; countervailing duty; emission tax;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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