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.

Foreign Capital Inflow, Exportability and the Indian Economy

“…Hence, Bhagwati (1973Bhagwati ( , 1987 argued that a government could strategically raise import barriers to incentivise FDI decisions, which is known as the tariff-jumping argument. Further, if transport or other logistic costs are treated similarly to tariffs and non-tariff barriers, the firms may find an incentive to locate directly in the market to sell the goods (Beladi et al, 2009;Hwang & Mai, 2002). However, if the economies of scale are active at the plant level, the production may lead to concentration, thus increasing the likelihood of supplying a foreign market through exports (Brainard, 1993;Markusen & Venables, 1998).…”

Is Democracy Necessary for Foreign Direct Investment Inflows in India?

“…The impact of India’s trade reforms, particularly tariff reforms, on the domestic industry has been investigated in a number of empirical studies. According to Beladi et al (2009), the average import penetration ratio in Indian industries did not increase between 1991 and 1995 compared to 1986–1990, and there was only a marginal increase between 1996 and 2000 despite significant reductions in tariff and non-tariff barriers. Tariff reforms have a significant positive effect on industrial productivity, according to Goldar and Kumari (2003).…”