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Profit taxation and the mode of foreign market entry

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  • Ronald B. Davies
  • Hartmut Egger
  • Peter Egger

Abstract

This paper studies the role of profit taxation for an international firm's decision upon how to penetrate a foreign market - through exports or through foreign direct investment (FDI) and local supply. We show that with harmonized taxes the international firm may choose FDI even though this has welfare costs from a global point of view. With tax competition, the host country can enforce exporting instead of FDI. This leads to a Nash equilibrium associated with higher world welfare than harmonized taxes. Thus, because of the effect on entry mode, tax competition provides heretofore unexplored benefits as compared to tax harmonization.

Suggested Citation

  • Ronald B. Davies & Hartmut Egger & Peter Egger, 2010. "Profit taxation and the mode of foreign market entry," Canadian Journal of Economics, Canadian Economics Association, vol. 43(2), pages 704-727, May.
    • Handle: RePEc:cje:issued:v:43:y:2010:i:2:p:704-727
    DOI: 10.1111/j.1540-5982.2010.01590.x
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    Cited by:

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    2. Charles Braymen & Yang-Ming Chang & Zijun Luo, 2016. "Tax Policies, Regional Trade Agreements and Foreign Direct Investment: A Welfare Analysis," Pacific Economic Review, Wiley Blackwell, vol. 21(2), pages 123-150, May.
    3. Giuseppe Francesco Gori & Luca Lambertini & Alessandro Tampieri, 2014. "Trade costs, FDI incentives, and the intensity of price competition," International Journal of Economic Theory, The International Society for Economic Theory, vol. 10(4), pages 371-385, December.
    4. Guðmundur Kristján Óskarsson & Helga Kristjánsdóttir, 2021. "EU Country and EFTA Country Export Differences," JRFM, MDPI, vol. 14(4), pages 1-8, March.
    5. Ines Kersan-Škabić, 2015. "The Importance of Corporate Taxation for FDI Attractiveness of Southeast European Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(1), pages 105-122, March.

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    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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