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Profit taxation and the mode of foreign market entry

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Author Info

  • 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.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 43 (2010)
Issue (Month): 2 (May)
Pages: 704-727

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Handle: RePEc:cje:issued:v:43:y:2010:i:2:p:704-727

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Cited by:
  1. Egger Peter & Wamser Georg, 2013. "Effects of the Endogenous Scope of Preferentialism on International Goods Trade," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 709-731, July.
  2. G. F. Gori & L. Lambertini & A. Tampieri, 2012. "Trade Costs, FDI incentives, and the Intensity of Price Competition," Working Papers wp810, Dipartimento Scienze Economiche, Universita' di Bologna.

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