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Competition in Taxes and Performance Requirements for Foreign Direct Investment

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  • Ronald B. Davies

    ()
    (University of Oregon Economics Department)

  • Christopher J. Ellis

    ()
    (University of Oregon Economics Department)

Abstract

Tax incentives offered to attract firms engaged in foreign direct investment are often tied to performance requirements such as domestic content restrictions. The tax competition literature has repeatedly shown that competition between municipalities for mobile firms tends to drive taxes to low levels. One would expect a comparable result for burdensome performance requirements. Despite this, the evidence suggests that while taxes have indeed been driven down, performance requirements are as popular as ever. We explain this seeming conundrum by showing that in the presence of spillovers, binding performance requirements can act as a coordination device for firms. In equilibrium, municipalities choose performance requirements which maximize joint surplus from investment. Competition between municipalities then transfers this surplus to firms via tax subsidies.

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Bibliographic Info

Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2001-4.

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Length: 19
Date of creation: 01 Jun 2001
Date of revision: 01 Jun 2001
Handle: RePEc:ore:uoecwp:2001-4

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Keywords: Foreign direct investment; tax competition; domestic content requirements;

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References

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Citations

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Cited by:
  1. Valeska Groenert & Ben Zissimos, 2013. "Developing Country Second-Mover Advantage in Competition Over Environmental Standards and Taxes," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 15(5), pages 700-728, October.
  2. Ronald B Davies, 2010. "The Silver Lining of Red Tape," Working Papers 201018, School Of Economics, University College Dublin.
  3. Valesca Groenert & Myrna Wooders & Ben Zissimos, 2008. "Competition over Standards and Taxes," Vanderbilt University Department of Economics Working Papers 0820, Vanderbilt University Department of Economics.
  4. Davies, Ronald B. & Eckel, Carsten, 2010. "Tax Competition for Heterogeneous Firms with Endogenous Entry," Munich Reprints in Economics 20021, University of Munich, Department of Economics.
  5. Peter Egger & Horst Raff, 2011. "Tax Rate and Tax Base Competition for Foreign Direct Investment," Kiel Working Papers 1734, Kiel Institute for the World Economy.
  6. Ronald B. Davies & Carsten Eckel, 2007. "Tax Competition for Heterogeneous Firms with Endogenous Entry:The Case of Heterogeneous Fixed Costs," The Institute for International Integration Studies Discussion Paper Series iiisdp213, IIIS.

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