Trade and Foreign Direct Investment Linkages: FDI versus Imports

M. Ozgur Kayalica () and Ensar Yilmaz ()
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M. Ozgur Kayalica: Istanbul Technical University
Ensar Yilmaz: Yildiz Technical University

EconoQuantum, Revista de Economia y Finanzas, 2004, vol. 1, issue 0, 49-63

Abstract: We develop a model where the host country government attempts to attract FDI in the presence of foreign competitors that export imperfectly substitute goods to the host country. The host country government is a welfare maximising agent with two available tax policies: a per unit output tax on foreign firms, and a per unit tariff on imports. We show that a positive tariff and a negative output tax will be optimal. However, when the policies are determined simultaneously the optimal combination is to have no tariff and to subsidize FDI. Also, when the governments tax policies are applied uniformly (as a consumption tax) the optimal tax is negative.

Date: 2004
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