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Competition for FDI and Profit Shifting

Listed author(s):
  • Jie Ma
  • Pascalis Raimondos-Møller

When countries compete for the location of a new multinational plant they need to be aware of the profit shifting opportunities this new plant creates for the global multinational firm. By modelling explicitly the multinational’s intra-firm transactions, we show that the home market advantage that large countries have due to their size will be counteracted by such profit shifting opportunities. As a result of this, large countries will not be able to capitalize on their size and sustain high corporate taxes. We show that, on the basis of these profit shifting opportunities, a small country can easily win the location game ahead of a large country. How lenient the small country is in implementing transfer pricing regulations turns out to be an important variable in such location games.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2015/wp-cesifo-2015-01/cesifo1_wp5153.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 5153.

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Date of creation: 2015
Handle: RePEc:ces:ceswps:_5153
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