miyagiwa_04

Host country governments often grant tax holidays to foreign firms locating in their territories. Although such preferential tax treatment appears to disadvantage local competitors who try to enter the new markets, tax holidays can actually facilitate entry by local firms. This pro-competitive effect stems from the fact that tax holidays are granted for a limited time. By making the foreign firm appear temporarily “tough”, tax holidays induce local firms to delay entry, which in turn prompts the foreign firm to accommodate entry rather than pursue costly entry-deterring strategies. Thus, tax holidays benefit both the foreign firms and local entrepreneurs.

Title:	Foreign Monopoly and Tax Holidays
Number:	04-16
Author:	Kaz Miyagiwa and Yuka Ohno
Issue Date:	November 2004
Abstract:	Host country governments often grant tax holidays to foreign firms locating in their territories. Although such preferential tax treatment appears to disadvantage local competitors who try to enter the new markets, tax holidays can actually facilitate entry by local firms. This pro-competitive effect stems from the fact that tax holidays are granted for a limited time. By making the foreign firm appear temporarily “tough”, tax holidays induce local firms to delay entry, which in turn prompts the foreign firm to accommodate entry rather than pursue costly entry-deterring strategies. Thus, tax holidays benefit both the foreign firms and local entrepreneurs.