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Theoretical Models Based on a Flowchart Approach to Industrial Cluster Policy

Discussion Papers

No.033

by KUCHIKI Akifumi
August 2005

ABSTRACT

This article examined the issue of whether or not the currency exchange rate, country risk, and cooperate tax rate affect decisions of multinational firms to invest in industrial clusters. First, if the exchange rate between a multinational company in an industry of diminishing returns to scale and a developing country is appreciated, then production in the developing country should increase. Second, if the investment period becomes longer, the currency exchange rate of a multinational company's country should be revalued more in order for it to further invest in the developing country. Third, if the investment period becomes longer, the developing country's risk should become less. Fourth, compensation for the developing country's high risk can be made by lowering its corporate tax rate.

Keywords: flowchart approach, industrial cluster policy, capacity building, institutions, exchange rate, country risk, corporate tax rate.
JEL classification: L5, L22, R11.

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