IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Asymmetric international transport costs and tax competition: the influence of a third country

Listed author(s):
  • Kyoko Hirose


    (Faculty of Economics, Kyushu Sangyo University)

  • Kazuhiro Yamamoto


    (Graduate school of Economics, Osaka University)

The purpose of this paper is to investigate the influence of a third country on the location of foreign direct investment (FDI). We focus on two determinants of FDI location. The first is the number of firms located in the third country. The second is the magnitude of demand for the good that the investing firm produces. We construct a three-country model, where two of the three countries are potential host countries and one has a geographic advantage in exports to the third country. Using this framework, we show that when the number of firms in the third country is sufficiently large, the farther (more distant) country is always the location of the plant. Furthermore, when the market size of the third country is large, it is possible for the nearer country to be the host country. In addition, we find that when the governments of the potential host countries use taxes or subsidies to attract FDI, the location of the firm investing is qualitatively the same as that without tax competition. However, the range over which the nearer country can attract the investing firm when tax competition is introduced is wider than otherwise. Finally, we reveal that when two potential host countries form a union that imposes a coordinated tax, the aggregate welfare of the union under the coordinated tax policy is higher than that under tax competition. However, conflict between the two countries may occur when the number of rival firms in the third country is neither too small nor too large.

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:
File Function: First version, 2013Mar
Download Restriction: no

Paper provided by Kyushu Sangyo University, Faculty of Economics in its series Discussion Papers with number 59.

in new window

Length: 21 pages
Date of creation: Mar 2013
Handle: RePEc:kyu:dpaper:59
Contact details of provider: Postal:
2-3-1 Matsukadai, Higashi-ku, Fukuoka, 813-8503

Phone: 092-673-5290
Fax: 092-673-5919
Web page:

More information through EDIRC

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.:

in new window

  1. Fumagalli, Chiara, 2003. "On the welfare effects of competition for foreign direct investments," European Economic Review, Elsevier, vol. 47(6), pages 963-983, December.
  2. Keith Head & Thierry Mayer, 2004. "Market Potential and the Location of Japanese Investment in the European Union," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 959-972, November.
  3. Becker, Johannes & Fuest, Clemens, 2010. "EU regional policy and tax competition," European Economic Review, Elsevier, vol. 54(1), pages 150-161, January.
  4. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2007. "Estimating models of complex FDI: Are there third-country effects?," Journal of Econometrics, Elsevier, vol. 140(1), pages 260-281, September.
  5. Raff, Horst, 2004. "Preferential trade agreements and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 88(12), pages 2745-2763, December.
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:kyu:dpaper:59. 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: (Yoshitsugu Kitazawa)

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.