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Tax competition, location, and horizontal foreign direct investment

Author Info

  • Kristian Behrens

    ()

    (CORE, Université catholique de Louvain, 34 voie du Roman Pays, 1348 Louvain-la-Neuve, Belgium)

  • Pierre M. Picard

    (Université catholique de Louvain; Belgium; and University of Manchester, UK)

Abstract

We develop a model of capital tax/subsidy competition in which imperfectly competitive firms choose both the number and the location of the plants they operate. The endogenous presence of horizontal multinationals is shown to attenuate the “race to the bottom” and yields some results that are opposite to traditional findings in the tax competition literature. First, in the presence of horizontal multinationals, increasing subsidies decrease firms' profits by exacerbating price competition due to more firms ‘going multinational’. Second, instead of being always subsidized, capital may actually be taxed in equilibrium. Third, taxes/subsidies become strategically independent policy instruments, instead of being strategic complements. Last, there may exist multiple equilibria with either low or high subsidies.

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File URL: http://www.ifigr.org/publication/ifir_working_papers/IFIR-WP-2006-08.pdf
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Paper provided by University of Kentucky, Institute for Federalism and Intergovernmental Relations in its series Working Papers with number 2006-08.

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Length: 40 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:ifr:wpaper:2006-08
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Keywords: capital tax competition; international trade; horizontal multinationals; foreign direct investment; imperfect competition;

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Find related papers by JEL classification:
  • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
  • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
  • H27 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other Sources of Revenue
  • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
  • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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Cited by:

  1. Hikaru Ogawa & David E. Wildasin, 2009. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," American Economic Review, American Economic Association, vol. 99(4), pages 1206-17, September.
  2. Christos Kotsogiannis & Robert Schwager, 2006. "Fiscal Equalization and Yardstick Competition," Working Papers 2006-15, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
  3. Wildasin, David E., 2007. "Pre–Emption: Federal Statutory Intervention in State Taxation," National Tax Journal, National Tax Association, vol. 60(3), pages 649-62, September.
  4. Toulemonde, Eric, 2007. "Home Market Effect versus Multinationals," IZA Discussion Papers 2829, Institute for the Study of Labor (IZA).

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