Theory and Methods Research Paper 2006 / 23 Tariff - Setting and Multinationals

This paper provides an analysis of non-cooperative tariff-setting in the presence on foreign direct investment. We set up a two-country general equilibrium model with co-existence of exporters and horizontal multinational firms. For symmetric countries, analytical results are derived. The theoretical analysis is enriched by numerical simulation exercises to provide a concise picture of how asymmetries in the economic fundamentals of countries affect our analytical findings. The main hypotheses are confirmed by empirical results from panel regressions. In particular, our findings support the theoretically appealing idea that tariff rates are higher when horizontal multinational firms are prevalent.