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

Ronald Davies (), Hartmut Egger () and Peter Egger ()

University of Oregon Economics Department Working Papers from University of Oregon Economics Department

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.

Keywords: Tax competition; Multinational enterprises; Profit taxation; Double taxation relief (search for similar items in EconPapers)
JEL-codes: F12 F23 H25 (search for similar items in EconPapers)
Date: 2003-04-10, Revised 2003-06-10
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Working Paper: Tax Competition for International Producers and the Mode of Foreign Market Entry (2007) Downloads
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