Tax competition, location, and horizontal foreign direct investment

Kristian Behrens () and Pierre Picard

No 2006-08, Working Papers from University of Kentucky, Institute for Federalism and Intergovernmental Relations

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.

Keywords: capital tax competition; international trade; horizontal multinationals; foreign direct investment; imperfect competition (search for similar items in EconPapers)
JEL-codes: F12 F23 H27 H73 R12 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2006-10
New Economics Papers: this item is included in nep-geo, nep-int, nep-mic and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Tax competition, location, and horizontal foreign direct investment (2005)
Working Paper: Tax Competition, Location, and Horizontal Foreign Direct Investment (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ifr:wpaper:2006-08

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