Asymmetric oligopoly and foreign direct investment: implications for host-country tax-setting

Porter, L. A. (2012) Asymmetric oligopoly and foreign direct investment: implications for host-country tax-setting. International Economic Journal, 26 (2). pp. 229-246. ISSN 1743-517X doi: 10.1080/10168737.2011.552515

Abstract/Summary

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.