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Economic Integration and Agglomeration of Multinational Production with Transfer Pricing

Hayato Kato and Hirofumi Okoshi

MPRA Paper from University Library of Munich, Germany

Abstract: Do low corporate taxes always favor multinational production over 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 them through transfer prices. With high trade costs, plants are concentrated in the low-tax country; surprisingly, this pattern reverses with low trade costs. Indeed, economic integration has a non-monotonic impact: falling trade costs first decreases and then increases the plant share in the high-tax country, which we empirically confirm. Moreover, allowing for transfer pricing makes tax competition tougher and international coordination on transfer-pricing regulation can be beneficial.

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)
Date: 2022-01-09
New Economics Papers: this item is included in nep-cwa and nep-int
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Related works:
Working Paper: Economic Integration and Agglomeration of Multinational Production with Transfer Pricing (2022) Downloads
Working Paper: Economic Integration and Agglomeration of Multinational Production with Transfer Pricing (2021) Downloads
Working Paper: Economic Integration and Agglomeration of Multinational Production with Transfer Pricing (2021) Downloads
Working Paper: Economic Integration and Agglomeration of Multinational Production with Transfer Pricing (2021) Downloads
Working Paper: Economic Integration and Agglomeration of Multinational Production with Transfer Pricing (2019) Downloads
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