Tariff-Jumping Direct Foreign Investment and Optimal Tariffs: A Three-Country Three-Finn Model

Youngjae Choi
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Youngjae Choi: Hongik University

Korean Economic Review, 2002, vol. 18, 253-266

Abstract: With a three-country (one home and two foreign countries) three-firm model, this paper investigates an optimal import tariff set by a home government subject to tariff-jumping direct foreign investment (DFI) by foreign firms. It is shown that, unlike the existing two-country two-firm model, DFI occurs in equilibrium for some parameterizations of cost and demand conditions. We also show that the host country can be better off with the inflow of tariff-jumping DFI than in the benchmark case where the foreign firms are not allowed to conduct DFI and the home government can set an unconstrained optimal tariff.

Keywords: Import tariff; direct foreign investment; oligopoly; welfare implications (search for similar items in EconPapers)
JEL-codes: F12 F23 (search for similar items in EconPapers)
Date: 2002
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