The Normative Evaluation and Social Choice of Contemporary Economic Systems

It is often observed that in order to serve the domestic market, foreign firms not only export but also control domestic firms through foreign direct investment (FDI). This paper examines the effects of tariffs, production subsidies, and foreign ownership regulation on prices, outputs, profits, and welfare when both exports and FDI coexist. Cross-border ownership on the basis of both financial interests and corporate control leads to horizontal market-linkages through which tariffs and production subsidies may not benefit locally-owned firms, because the foreign firm shifts production across borders to evade the burden or even take advantage of commercial policies. The effects of ownership regulation depends on both the initial ownership share and the substitutability between goods. JEL Classification Numbers: F12, F13, F23