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摘要
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This paper analyzes tax competition for foreign
direct investment with country risk using a two-country model with different
market sizes. We show that the trade-off between country size as a locational advantage and country risk as a locational disadvantage affects the location choice of a
foreign firm. Given the circumstance in which the foreign firm faces the same
probabilities of country risk in both potential host countries when deciding
investment location, our analysis shows that if the market size of the
high-risk country is sufficiently large relative to the low-risk country, the
foreign firm benefits from choosing the high-risk larger country even if the
host country's government imposes a lump-sum tax. Given the situation in which
the foreign firm faces different probabilities of country risk in each host
country, our results show that the important matter for the foreign firm is
whether the host country is high-cost or low-cost,
rather than whether the host country is high-risk.
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