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Competing for Foreign Direct Investments: A Real Options Approach

Author

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  • Paolo Panteghini
  • Guttorm Schjelderup

Abstract

This paper uses the Bad News Principle to study how the ability of multinationals to shift profits by transfer pricing affects both the timing of foreign direct investment decisions and government tax policy. A main finding of the paper is that if countries compete to attract foreign direct investments, only weak conditions are needed to establish that welfare is higher when firms can postpone irreversible investments as opposed to when they cannot.

Suggested Citation

  • Paolo Panteghini & Guttorm Schjelderup, 2003. "Competing for Foreign Direct Investments: A Real Options Approach," CESifo Working Paper Series 929, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_929
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    File URL: http://www.cesifo-group.de/DocDL/cesifo_wp929.pdf
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    References listed on IDEAS

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    1. Haufler, Andreas & Schjelderup, Guttorm, 2000. "Corporate Tax Systems and Cross Country Profit Shifting," Oxford Economic Papers, Oxford University Press, pages 306-325.
    2. Devereux, Michael P. & Griffith, Rachel, 1998. "Taxes and the location of production: evidence from a panel of US multinationals," Journal of Public Economics, Elsevier, vol. 68(3), pages 335-367, June.
    3. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
    4. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
    5. Hines, James R. Jr., 1999. "Lessons From Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(2), pages 305-322, June.
    6. Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, vol. 88(6), pages 1065-1091, June.
    7. Paolo Panteghini, 2002. "Endogenous Timing and the Taxation of Discrete Investment Choices," CESifo Working Paper Series 723, CESifo Group Munich.
    8. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(2), pages 269-304, June.
    9. 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.
    10. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
    11. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
    12. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
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    Citations

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    Cited by:

    1. Zambujal-Oliveira, J., 2012. "Tax competition for foreign direct investment under information uncertainty," Economic Modelling, Elsevier, vol. 29(6), pages 2269-2273.
    2. Paolo Panteghini & Guttorm Schjelderup, 2006. "To Invest or not to Invest: A real options approach to FDIs and tax competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 13(6), pages 643-660, November.

    More about this item

    Keywords

    corporate taxation; irreversibility; MNE; real options and uncertainty;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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