Tax Competition, Location, and Horizontal Foreign Direct Investment

CORE Discussion Paper No. 2005/91

35 Pages Posted: 24 Feb 2006

See all articles by Kristian Behrens

Kristian Behrens

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Université de Bourgogne - LATEC

Pierre M. Picard

Centre de Recherche en Économie Appliquée (CREA); Universite du Luxembourg

Date Written: December 2005

Abstract

We develop a model of capital tax competition in which imperfectly competitive firms choose both the number of plants they operate and their location. When compared to models with single-plant firms, the presence of multinationals reverses some standard results. First, instead of being subsidized, capital may actually be taxed in equilibrium, which shows that the presence of taxable 'multinational rents' relaxes tax competition. Second, even when firms are subsidized, their subsidy-inclusive profits may be decreasing in subsidies, due to fiercer price competition by more multinationals. Third, multinationals may give rise to multiple equilibria in the tax game, one of which can be a 'subsidy trap' characterized by many multinationals, high subsidy levels, and low welfare.

Keywords: capital tax competition, international trade, multi-plant location problem, foreign direct investment, imperfect competition

JEL Classification: F12, F23, H27, H73, R12

Suggested Citation

Behrens, Kristian and Picard, Pierre M., Tax Competition, Location, and Horizontal Foreign Direct Investment (December 2005). CORE Discussion Paper No. 2005/91, Available at SSRN: https://ssrn.com/abstract=884413 or http://dx.doi.org/10.2139/ssrn.884413

Kristian Behrens (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

HOME PAGE: http://www.core.ucl.ac.be:16080/~behrens/

Université de Bourgogne - LATEC

Pôle d'Economie et de Gestion
21066 Dijon Cedex
France

Pierre M. Picard

Centre de Recherche en Économie Appliquée (CREA) ( email )

Campus Limpertsberg
162A, avenue de la Faïencerie
Luxembourg, 1511
Luxembourg

Universite du Luxembourg

L-1511 Luxembourg
Luxembourg

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