This paper develops a partial equilibrium model of foreign direct investment to analyze
the potentially opposing interests between a host and foreign country. The two countries
are fiscally interdependent and the fiscal variable is set unilaterally by the foreign country.
The analysis indicates that fiscal independence is welfare-enhancing, particularly in the case
where the outflow of FDI is large. The case where a lump-sum subsidy is set to address the
exit of rms indicates that the need for subsidy payments subside under fiscal independence.
