The impacts of PTA formation on small economies’ tax competition for FDI inflows ☆

摘要: Abstract This paper examines why small economies are so eager to form or join preferential trade agreements (PTAs), as observed in the East Asia and Central Europe, taking consideration of strategic impacts PTA formation on tax competition for foreign direct investment (FDI) inflows. Based a simple model where three asymmetric countries compete FDI inflows, we demonstrate that provides advantage member country competing inflows not only with respect non-member but large when integrated market size is enough. In addition, it shown might be an out-of-equilibrium path strategy economy exert efforts induce because excessive subsidies outweigh gains from due disadvantage after formation. These findings explain mainly driven by expected economic benefits including joining PTA.