TAX POLICY ON FOREIGN DIRECT-INVESTMENT IN THE PRESENCE OF CROSS-HAULING

The authors develop a partial equilibrium model of foreign direct inve stment (FDI) in which identical foreign firms locate themselves in a h ost country to compete with internationally mobile domestic firms in n on-tradeable oligopolistic markets for two differentiated commodities. The host country, which is small in the market for FDI, uses lump-sum subsidy (tax) to encourage (discourage) FDI. There is unemployment in the host country. Under this framework, the authors analyse the effec t of discriminatory and uniform subsidies on the inflow/outflow of dom estic and foreign firms and on employment. They also derive some prope rties of optimal subsidies. JEL no. F2, H2.