Optimal Trade Policy, Foreign Ownership and Corporate Control

Abstract

This paper constructs a two-country, three-firm trade model with a two-stage game to explore the unilateral optimal export policy under Cournot competition, when the domestic export firm undertakes Cross-border ownership. We find that the optimal export policy is subsidy when domestic multinational does not has control of a local firm through partial ownership. However, the optimal export policy of the domestic country is to levy a tax when domestic multinational has control of a local firm. Moreover, the optimal export policy is free trade if there is no foreign ownership regulation possessed by foreign country.