FDI, Trade Costs and Regional Assymetries

Julia Darby, Ben Ferrett, Ian Wooton

Research output: Working paperDiscussion paper

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.
LanguageEnglish
Place of PublicationGlasgow
PublisherUniversity of Strathclyde
Pages1-22
Number of pages24
Volume13
Publication statusPublished - 4 Nov 2013

Fingerprint

Trade costs
Tax
Centrality
Hub
Geography
Tax competition
Innovation
Subsidies
Corporate tax
Equilibrium distribution
Industry

Keywords

  • corporate taxes
  • devolution
  • trade costs

Cite this

Darby, J., Ferrett, B., & Wooton, I. (2013). FDI, Trade Costs and Regional Assymetries. (27 ed.) (pp. 1-22). Glasgow: University of Strathclyde.
Darby, Julia ; Ferrett, Ben ; Wooton, Ian. / FDI, Trade Costs and Regional Assymetries. 27. ed. Glasgow : University of Strathclyde, 2013. pp. 1-22
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Darby, J, Ferrett, B & Wooton, I 2013 'FDI, Trade Costs and Regional Assymetries' 27 edn, University of Strathclyde, Glasgow, pp. 1-22.

FDI, Trade Costs and Regional Assymetries. / Darby, Julia; Ferrett, Ben; Wooton, Ian.

27. ed. Glasgow : University of Strathclyde, 2013. p. 1-22.

Research output: Working paperDiscussion paper

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N2 - 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.

AB - 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.

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Darby J, Ferrett B, Wooton I. FDI, Trade Costs and Regional Assymetries. 27 ed. Glasgow: University of Strathclyde. 2013 Nov 4, p. 1-22.