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

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

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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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. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  2. Alexander Hijzen & Holger Görg & Miriam Manchin, 2006. "Cross-border mergers and acquisitions and the role of trade costs," European Economy - Economic Papers 2008 - 2015 242, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  3. Johannes Becker & Clemens Fuest, 2010. "Taxing Foreign Profits With International Mergers And Acquisitions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 171-186, 02.
  4. Huizinga, Harry & Voget, Johannes, 2006. "International Taxation and the Direction and Volume of Cross-Border M&As," CEPR Discussion Papers 5974, C.E.P.R. Discussion Papers.
  5. 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.
  6. Becker, Johannes & Fuest, Clemens, 2011. "Tax competition -- Greenfield investment versus mergers and acquisitions," Regional Science and Urban Economics, Elsevier, vol. 41(5), pages 476-486, September.
  7. 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, March.
  8. Peter Egger & Simon Loretz & Michael Pfaffermayr & Hannes Winner, 2006. "Corporate Taxation and Multinational Activity," CESifo Working Paper Series 1773, CESifo Group Munich.
  9. Harry Huizinga & Johannes Voget & Wolf Wagner, 2008. "International Taxation and Takeover Premiums in Cross-border M&As," Working Papers 0826, Oxford University Centre for Business Taxation.
  10. 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.
  11. Büttner, Thiess & Ruf, Martin, 2004. "Tax Incentives and the Location of FDI: Evidence from a Panel of German Multinationals," ZEW Discussion Papers 04-76, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  12. J. Peter Neary, 2004. "Cross-border mergers as instruments of comparative advantage," Working Papers 200404, School of Economics, University College Dublin.
  13. 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.
  14. 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.
  15. 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.
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