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Tax Competition for International Producers and the Mode of Foreign Market Entry

Author

Listed:
  • Ronald B. Davies

    (University of Oregon Economics Department)

  • Hartmut Egger

    (University of Zurich, CESifo Munich, and Centre for Globalization and Economic Policy, University of Nottingham)

  • Peter Egger

    (-Maximilian University of Munich, CESifo Munich, and Centre for Globalization and Economic Policy, University of Nottingham)

Abstract

This paper studies non-cooperative tax competition between two countries for an international producer. The international producer chooses where to locate its headquarters and whether to serve the overseas market through exports or foreign direct investment (FDI). We show that, in the absence of tax competition, the international firm may choose FDI even though this has welfare costs from a global point of view. With tax competition, the host country can use its tax rate to enforce exporting instead of FDI, thereby leading to a Nash equilibrium in the tax setting game which is associated with higher world welfare than the no-tax situation. Thus, because of the effect on entry mode, tax competition provides heretofore unexplored benefits.

Suggested Citation

  • Ronald B. Davies & Hartmut Egger & Peter Egger, 2003. "Tax Competition for International Producers and the Mode of Foreign Market Entry," University of Oregon Economics Department Working Papers 2006-19, University of Oregon Economics Department, revised 10 Jun 2003.
    • Handle: RePEc:ore:uoecwp:2006-19
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    References listed on IDEAS

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    Cited by:

    1. Egger, Peter & Eggert, Wolfgang & Winner, Hannes, 2010. "Saving taxes through foreign plant ownership," Journal of International Economics, Elsevier, vol. 81(1), pages 99-108, May.
    2. 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.
    3. Joseph P. Daniels & Marc Ruhr, 2014. "Transportation Costs and US Manufacturing FDI," Review of International Economics, Wiley Blackwell, vol. 22(2), pages 299-309, May.
    4. Nils Herger & Christos Kotsogiannis & Steve McCorriston, 2011. "International Taxation and FDI Strategies: Evidence From US Cross-Border Acquisitions," Discussion Papers 1109, University of Exeter, Department of Economics.

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    More about this item

    Keywords

    Tax competition; Multinational enterprises; Profit taxation; Double taxation relief;
    All these keywords.

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

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