《《Foreign_direct_investment_and___industry_structure》.pdf

Journal of Foreign direct investment and Economic Studies industry structure 26,1 Xiangkang Yin 38 La Trobe University, Bundoora, Victoria, Australia Keywords Developing countries, Foreign investment, Incentives, Taxation, Technology transfer Abstract Using a differentiated oligopoly, this paper studies the effects of tax incentives on the structure of a domestic industry in terms of price, output, profit, and entry/exit, taking account of technology transfer through FDI. It is found that if the government of the host country provides more tax relief for foreign firms, it will raise total output and reduce price index. More foreign firms will enter the industry while certain existing host firms will have to exit. Consumers are better off if income is unchanged; otherwise, the change in social welfare is ambiguous in general and several sufficient conditions ensuring definite outcomes have been identified. This suggests that the government should be cautious in reducing taxes to attract FDI and should differ their preferential tax treatments across industries. Introduction The volume of foreign direct investment (FDI) grew rapidly over the past 20 years or so, especially in developing countries (see Tables I and II). This phenomenon has been examined by many authors. In addition to conventional macro theoretical analysis[1] there is an industrial organisation (IO) approach