Profit taxation and the mode of foreign market entry |
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Authors: | Ronald B. Davies Hartmut Egger Peter Egger |
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Affiliation: | 1. University College Dublin, School of Economics;2. University of Bayreuth, Faculty of Law and Economics;3. ETH Zürich, Department Management, Technology and Economics |
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Abstract: | 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. |
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Keywords: | F23 H25 |
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