Country size and tax policy for international joint ventures in an integrated market

We investigate international joint ventures in an integrated market using a two-country model with asymmetric sizes. We show that although the domestic firm in the small country is less efficient, it is possible that the government of the small country imposes a higher tax than that of the large country. Moreover, we show that even if the domestic firm in the large country is less efficient, a joint venture by this firm and the foreign firm could be more productive, and the foreign firm could prefer to form a joint venture partnership with the domestic firm in the large country.

► We investigate international joint ventures in an integrated market. ► We focus on the difference in market size between potential host countries. ► The foreign firm's location choice and the government's tax policy are discussed. ► The tax policy depends on market size and domestic firm's efficiency. ► The smaller country imposes a higher tax on the joint venture firm.