Do multinational firms invest more? On the impact of internal debt financing and transfer pricing on capital accumulation

This study analyses whether multinational companies (MNCs) that are able to reduce their tax burden on capital by shifting profits to low tax jurisdictions invest more than domestic firms. To study the relationship, I exploit a massive corporate tax rate cut of 10%-points in Germany 2008 as a quasi-natural experiment. This reform reduced substantially the incentive of MNC to engage in profit shifting. Using a difference in differences matching strategy (DiD), the results suggest that MNCs decreased their fraction of internal borrowing and their capital stock compared to purely domestic firms. Taking the evidence together, the findings suggest that if MNCs shift profits abroad, their capital accumulation is less depressed by the national tax rate and, therefore, benefits less from a tax rate reduction. The DiD results are confirmed by a more structural approach, which exploits variation in the tax incentive to shift profits to the headquarters for identification. Further, the results suggest that only internal debt financing but not transfer pricing fosters capital accumulation.