Tariff Jumping and Joint Ventures

Abstract

It is well known that high tariffs tend to induce foreign direct investment (FDI) by encouraging the investors to jump the “tariff wall.” This paper examines the economic interaction among tariffs, FDI, and international joint ventures (IJV). We show that in the presence of a strong local competitor, even if opening a fully owned subsidiary is not profitable to a foreign firm, the foreign firm may still enter the host country market through IJV. However, IJV is not profitable for sufficiently high tariff rates. Hence, we argue that liberal trade policies may attract foreign investments through the formation of joint ventures.