Abstract
This paper analyzes policy competition for a foreign-owned monopolist firm between two asymmetric countries. In particular, one country has a larger economy than the other country does. At the same time, the small country produces an intermediate good for the final good production, while the large country does not. We show that whether a country will win FDI competition is determined by the interaction between relative transport costs of intermediate and final goods and the market size of the large country relative to that of the small country; and policy competition for FDI may Pareto improve the welfare of the competing countries.
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