Tax Competition for International Producers and the Mode of Foreign Market Entry
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Date
2003-04-10
Authors
Davies, Ronald B.
Egger, Hartmut
Egger, Peter
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon, Dept of Economics
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.
Description
40 p.
Keywords
Tax competition, Multinational enterprises, Profit taxation, Double taxation relief