Economic Integration and Agglomeration of Multinational Production with Transfer Pricing
Hayato Kato and
MPRA Paper from University Library of Munich, Germany
Do low corporate taxes always favor multinational production in the course of economic integration? We propose a two-country model in which multinationals choose the locations of production plants and foreign distribution affiliates and shift profits between home plants and foreign affiliates by manipulating transfer prices in intra-firm trade. We show that when trade costs are high, plants are concentrated in the low-tax country, but surprisingly this location pattern reverses when they are low. Unlike existing models with single-plant firms, the impact of economic integration is non-monotonic, which we empirically confirm: a fall in trade costs first decreases and then increases the share of plants in the high-tax country. We also analyze tax competition and find that allowing for transfer pricing makes competition tougher, indicating a possibility of international coordination on transfer-pricing regulation making the world better off.
Keywords: Profit shifting; Multinational firms; Intra-firm trade; Trade costs; Foreign direct investment (FDI) (search for similar items in EconPapers)
JEL-codes: F12 F23 H25 H26 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cwa and nep-int
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Working Paper: Economic Integration and Agglomeration of Multinational Production with Transfer Pricing (2021)
Working Paper: Economic Integration and Agglomeration of Multinational Production with Transfer Pricing (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:105536
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