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Tax competition, location, and horizontal foreign direct investment

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  • BEHRENS, Kristian
  • PICARD, Pierre M.

Abstract

We develop a model of capital tax competition in which imperfectly competitive firms choose both the number of plants they operate and their location. When compared to models with single-plant firms, the presence of multinationals reverses some standard results. First, instead of being subsidized, capital may actually be taxed in equilibrium, which shows that the presence of taxable "multinational rents" relaxes tax competition. Second, even when firms are subsidized, their subsidy-inclusive profits may be decreasing in subsidies, due to fiercer price competition by more multinationals. Third,multinationals may give rise to multiple equilibria in the tax game, one of which can be a "subsidy trap" characterized by many multinationals, high subsidy levels, and low welfare.

Suggested Citation

  • BEHRENS, Kristian & PICARD, Pierre M., 2005. "Tax competition, location, and horizontal foreign direct investment," LIDAM Discussion Papers CORE 2005091, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2005091
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    Cited by:

    1. Toulemonde, Eric, 2007. "Home Market Effect versus Multinationals," IZA Discussion Papers 2829, Institute of Labor Economics (IZA).
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    3. Christos Kotsogiannis & Robert Schwager, 2006. "Fiscal Equalization and Yardstick Competition," Working Papers 2006-15, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    4. Hikaru Ogawa & David E. Wildasin, 2009. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," American Economic Review, American Economic Association, vol. 99(4), pages 1206-1217, September.

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    More about this item

    Keywords

    capital tax competition; international trade; multi-plant location problem; foreign direct investment; imperfect competition;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H27 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other Sources of Revenue
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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