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Tax competition for foreign direct investment under information uncertainty

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  • Zambujal-Oliveira, J.

Abstract

The relation between taxation states and foreign direct investment (FDI) has been studied from several perspectives and with states at different levels of development. Most previous studies, however, have only considered the impact of tax level on FDI volume. This paper enhances this view by assuming that multinational enterprises (MNEs) can use transfer prices systems and have investment timing flexibility. Thus, it evaluates the impact of the use of international transfer pricing systems on state policy and on the investment timings of MNEs. In uncertain business environments (with the periodic releases of news), investment can increase if MNEs delay investment decisions. This paper shows how tax differentials can attract FDI and can influence MNE behavior. The equilibrium is set in a global environment where MNEs can shift their profits between states depending on local corporate tax rates. Assuming the use of transfer pricing schemes, this paper confirms the relationship between MNE behavior and the release of business news.

Suggested Citation

  • Zambujal-Oliveira, J., 2012. "Tax competition for foreign direct investment under information uncertainty," Economic Modelling, Elsevier, vol. 29(6), pages 2269-2273.
    • Handle: RePEc:eee:ecmode:v:29:y:2012:i:6:p:2269-2273
    DOI: 10.1016/j.econmod.2012.06.030
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    References listed on IDEAS

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    More about this item

    Keywords

    Corporate taxation; International profit shifting; Real options; FDI;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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