Profit taxation and the mode of foreign market entry

Ronald Davies, Hartmut Egger () and Peter Egger

Canadian Journal of Economics, 2010, vol. 43, issue 2, 704-727

Abstract: This paper studies the role of profit taxation for an international firm's decision upon how to penetrate a foreign market - through exports or through foreign direct investment (FDI) and local supply. We show that with harmonized taxes 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 enforce exporting instead of FDI. This leads to a Nash equilibrium associated with higher world welfare than harmonized taxes. Thus, because of the effect on entry mode, tax competition provides heretofore unexplored benefits as compared to tax harmonization.

JEL-codes: F23 H25 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (5)

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