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The Effects Of Taxation On The Location Decision Of Multinational Firms: M&A Versus Greenfield Investments

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  • Hebous, Shafik
  • Ruf, Martin
  • Weichenrieder, Alfons J.

Abstract

In this study, we estimate the impact of differences in international tax rates on the probability of choosing a location for an affiliate of a multinational firm. In particular, we distinguish between the tax sensitivity of Greenfield and Mergers and Acquisitions (M&A) investments. Based on a novel firm-level dataset on German outbound foreign direct investment (FDI), we find evidence that location decisions of M&A investments are less sensitive to differences in tax rates than location decisions of Greenfield investments. According to our logit estimates, after controlling for firm and country-specific characteristics, the tax elasticity for Greenfield investments is negative and in absolute value significantly larger than that associated with M&A investments. This finding is consistent with (partial) capitalization of taxes in the acquisition price when the FDI project takes the form of a M&A.

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Bibliographic Info

Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 64 (2011)
Issue (Month): 3 (September)
Pages: 817-38

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Handle: RePEc:ntj:journl:v:64:y:2011:i:3:p:817-38

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  1. Javorcik, Beata S. & Wei, Shang-Jin, 2009. "Corruption and cross-border investment in emerging markets: Firm-level evidence," Journal of International Money and Finance, Elsevier, vol. 28(4), pages 605-624, June.
  2. Harry P. Huizinga & Johannes Voget, 2009. "International Taxation and the Direction and Volume of Cross-Border M&As," Journal of Finance, American Finance Association, vol. 64(3), pages 1217-1249, 06.
  3. Ragnhild Balsvik & Stefanie A. Haller, 2011. "Foreign firms and host-country productivity: does the mode of entry matter?," Oxford Economic Papers, Oxford University Press, vol. 63(1), pages 158-186, January.
  4. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  5. Thiess Buettner & Martin Ruf, 2007. "Tax incentives and the location of FDI: Evidence from a panel of German multinationals," International Tax and Public Finance, Springer, vol. 14(2), pages 151-164, April.
  6. Johannes Becker & Clemens Fuest, 2008. "Tax Competition – Greenfield Investment versus Mergers and Acquisitions," CESifo Working Paper Series 2247, CESifo Group Munich.
  7. Neary, J. Peter, 2004. "Cross-Border Mergers as Instruments of Comparative Advantage," Center for European, Governance and Economic Development Research Discussion Papers 34, University of Goettingen, Department of Economics.
  8. Andersson, Thomas & Svensson, Roger, 1994. " Entry Modes for Direct Investment Determined by the Composition of Firm-Specific Skills," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(4), pages 551-60.
  9. Harry Huizinga & Johannes Voget & Wolf Wagner, 2008. "International Taxation and Takeover Premiums in Cross-border M&As," Working Papers 0809, Oxford University Centre for Business Taxation.
  10. Ruud A. de Mooij & Sjef Ederveen, 2008. "Corporate Tax Elasticities A Reader’s Guide to Empirical Findings," Working Papers 0822, Oxford University Centre for Business Taxation.
  11. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
  12. Peter Egger & Simon Loretz & Michael Pfaffermayr & Hannes Winner, 2006. "Corporate Taxation and Multinational Activity," CESifo Working Paper Series 1773, CESifo Group Munich.
  13. Johannes Becker & Clemens Fuest, 2007. "Taxing Foreign Profits with International Mergers and Acquisitions," Working Papers 0719, Oxford University Centre for Business Taxation.
  14. Mintz, Jack M. & Weichenrieder, Alfons J., 2010. "The Indirect Side of Direct Investment: Multinational Company Finance and Taxation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262014491, December.
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Cited by:
  1. Keller, Sara & Schanz, Deborah, 2013. "Tax attractiveness and the location of German-controlled subsidiaries," arqus Discussion Papers in Quantitative Tax Research 142, arqus - Arbeitskreis Quantitative Steuerlehre.
  2. Keller, Sara & Schanz, Deborah, 2013. "Measuring tax attractiveness across countries," arqus Discussion Papers in Quantitative Tax Research 143, arqus - Arbeitskreis Quantitative Steuerlehre.

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