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Tax Competition for Foreign Direct Investment

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  • Haufler, Andreas
  • Wooton, Ian

Abstract

This paper analyses tax competition between two countries of unequal size trying to attract a foreign-owned monopolist. When regional governments have only a lump-sum profit tax (subsidy) at their disposal, but face exogenous and identical transport costs for imports, then both countries will always offer to subsidize the firm. Furthermore, the maximum subsidy is greater in the larger region. If countries are given an additional instrument (either a tariff or a consumption tax), however, then the larger country will no longer underbid its smaller rival and its best offer may involve a positive profit tax. In both cases the equilibirum outcome is that the firm locates in the larger market, paying a profit tax that is increasing in the relative size of this market and which is made greater when the tariff (consumption tax) instrument is permitted.

Suggested Citation

  • Haufler, Andreas & Wooton, Ian, 1997. "Tax Competition for Foreign Direct Investment," CEPR Discussion Papers 1583, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1583
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    Cited by:

    1. Jan I. Haaland & Ian Wooton, 1998. "International Competition for Foreign Multinational Investment," Working Papers 9812, Business School - Economics, University of Glasgow.
    2. Felipa Mello Sampayo, 2006. "The Geographic Distribution of Economic Activities of the USA Multinational Enterprises," DEGIT Conference Papers c011_040, DEGIT, Dynamics, Economic Growth, and International Trade.
    3. Karen Crabbé, 2013. "Are Your Firm´s Taxes Set in Warsaw? Spatial Tax Competition in Europe," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(3), pages 317-337, September.
    4. Libman, Alexander, 2009. "Russian federalism and post-Soviet integration: Divergence of development paths," MPRA Paper 12944, University Library of Munich, Germany.
    5. Facundo Albornoz & Gregory Corcos & Toby Kendall, 2007. "Subsidy Competition and the Mode of FDI: Acquisition vs Greenfield," Discussion Papers 05-15, Department of Economics, University of Birmingham.
    6. Cooray, Arusha & Tamazian, Artur & Vadlamannati, Krishna Chaitanya, 2014. "What drives FDI policy liberalization? An empirical investigation," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 179-189.
    7. Aikaterini Kokkinou & Yannis Psycharis, 2005. "Foreign Direct Investment and Regional Attractiveness in Southeastern European countries," ERSA conference papers ersa05p382, European Regional Science Association.
    8. Robert C. Schmidt & Marco Runkel, 2016. "Environmental tax competition under firm mobility and leakage," Working Papers 2015016, Berlin Doctoral Program in Economics and Management Science (BDPEMS).
    9. Simon Munongo, & Olusegun Ayo Akanbi & Zurika Robinson, 2017. "Do tax incentives matter for investment? A literature review," Business and Economic Horizons (BEH), Prague Development Center, vol. 13(2), pages 152-168, May.
    10. Sourav Bhattacharya & Tapas Kundu, 2011. "Resistance, Redistribution and Investor Friendliness," Working Paper 454, Department of Economics, University of Pittsburgh, revised Jan 2012.
    11. Libman, Alexander Mikhailovich, 2009. "Эндогенные Границы И Распределение Власти В Федерациях И Международных Сообществах [ENDOGENOUS BOUNDARIES AND DISTRIBUTION OF POWER In the Federation]," MPRA Paper 16473, University Library of Munich, Germany.
    12. Pieretti, Patrice & Zanaj, Skerdilajda, 2011. "On tax competition, public goods provision and jurisdictions' size," Journal of International Economics, Elsevier, vol. 84(1), pages 124-130, May.
    13. 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.
    14. Oscar Amerighi & Giuseppe Feo, 2017. "Tax competition for foreign direct investments and the nature of the incumbent firm," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(4), pages 811-826, August.
    15. Müller, Thomas, 2003. "The Multinational Enterprise," Munich Dissertations in Economics 799, University of Munich, Department of Economics.
    16. Facundo Albornoz, Gregory Corcos and Toby Kendall, 2005. "Subsidy Competition and the Mode of FDI: Acquisition vs Greenfield," Discussion Papers 05-15, Department of Economics, University of Birmingham.
    17. Norbäck, Pehr-Johan & Persson, Lars & Vlachos, Jonas, 2006. "Cross-Border Acquisitions and Corporate Taxes: Efficiency and Tax Revenues," Working Paper Series 663, Research Institute of Industrial Economics.
    18. Facundo Albornoz & Grégory Corcos, 2005. "Subsidy competition in integrating economies," Working Papers halshs-00590785, HAL.
    19. Michael Keen & Kai A. Konrad, 2012. "International Tax Competition and Coordination," Working Papers international_tax_competi, Max Planck Institute for Tax Law and Public Finance.
    20. David Collie & Hylke Vandenbussche, 2005. "Can Import Tariffs Deter Outward FDI?," Open Economies Review, Springer, vol. 16(4), pages 341-362, October.
    21. Peter Egger & Horst Raff, 2015. "Tax rate and tax base competition for foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(5), pages 777-810, October.
    22. Jun Oshiro, 2011. "Tariff Policy and Transport Costs under Reciprocal Dumping," Discussion Papers in Economics and Business 11-17, Osaka University, Graduate School of Economics.

    More about this item

    Keywords

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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