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Trade and Foreign Direct Investment Linkages: FDI versus Imports

Author

Listed:
  • M. Ozgur Kayalica

    (Istanbul Technical University)

  • Ensar Yilmaz

    (Yildiz Technical University)

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.

Suggested Citation

  • M. Ozgur Kayalica & Ensar Yilmaz, 2004. "Trade and Foreign Direct Investment Linkages: FDI versus Imports," EconoQuantum, Revista de Economia y Finanzas, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 1(0), pages 49-63, Enero - J.
    • Handle: RePEc:qua:journl:v:1:y:2004:i:0:p:49-63
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    Cited by:

    1. Luis Gautier, 2017. "Foreign direct investment under fiscal interdependence when policy is set unilaterally," International Economics and Economic Policy, Springer, vol. 14(4), pages 579-599, October.

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