ABSTRACT
The essential channel of locational competition is the mobility of capital. The economic instruments used are the supply of public goods and taxation. Locational competition has a major impact on the position of the immobile factor labor and restricts the maneuvering space of national economic policy. Locational competition operates through different channels. In this paradigm, the main channel of interdependence between countries is the mobility of factors of production, especially the mobility of physical capital and of new technological knowledge. Apart from competition in taxation and in the supply of public goods, there is also competition between institutional arrangements of countries. The Pacific rim countries have followed the opposite route. They were outward oriented and they did not distort relative prices between export goods and import goods. The alternative to the country-of-origin principle, according to which the country of origin rules are also applied to the importing country, is the country-of-destination principle.
