Tariff Jumping and Joint Ventures

It is well known that high tariffs tend to induce direct foreign investment (DFI) by encouraging the investors to jump the “tariff-wall”. We argue that in the presence of a “tough” local competitor DFI may not be possible but suitable designed joint-ventures (JV) between the local and the foreign firm would be feasible. However, very high tariffs would be detrimental to the formation of such joint ventures. Hence we argue that liberal trade policies may attract foreign investments through the formation of joint-ventures.