FDI, Trade Costs and Regional Asymmetries

24 Pages Posted: 26 Nov 2013

See all articles by Julia Darby

Julia Darby

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics

Ben Ferrett

Loughborough University

Ian Wooton

University of Strathclyde - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 25, 2013

Abstract

We set up a trade model where three countries compete for an exogenous number of firms. Our innovation lies in the geography of the model. Of the three countries, one is the hub through which all trade takes place. First, we establish the natural geography of the region, which is given by the equilibrium distribution of industrial activity in the absence of taxes or subsidies. We then examine the implications for corporate taxes when the countries compete with each other to attract firms. We find that, even when all countries are the same size, the centrality of the hub gives it an advantage in tax setting, such that its equilibrium tax can be larger than that of the spokes and yet it still attracts a disproportionate share of industry. Thus geographic advantage in tax competition has a second dimension, centrality in addition to size.

Keywords: corporate taxes, devolution, trade costs

JEL Classification: F150, F230, H250, H730

Suggested Citation

Darby, Julia and Ferrett, Ben and Wooton, Ian, FDI, Trade Costs and Regional Asymmetries (November 25, 2013). CESifo Working Paper Series No. 4469, Available at SSRN: https://ssrn.com/abstract=2359383 or http://dx.doi.org/10.2139/ssrn.2359383

Julia Darby

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics ( email )

Sir William Duncan Building
130 Rottenrow
Glasgow, G4 0GE
United Kingdom

HOME PAGE: http://www.economics.strath.ac.uk/julia/

Ben Ferrett

Loughborough University ( email )

School of Business and Economics
Loughborough University
Loughborough, LE11 3TU
Great Britain

Ian Wooton (Contact Author)

University of Strathclyde - Department of Economics ( email )

Sir William Duncan Building
130 Rottenrow
Glasgow G4 0GE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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