DP11325 | Does tax competition make mobile firms more footloose?

Publication Date

06/12/2016

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Abstract

Existing analyses of fiscal competition for foreign direct investment (FDI) often assume a one-shot interaction between governments and the firm within a static environment where the firm makes a permanent location choice. We examine a two-period regional model where economic geography evolves, giving the firm an incentive to relocate between periods. Government competition for FDI leads the firm to make efficient location choices, with relocation “more likely” in the presence of international tax competition, because the winning country’s bid absorbs some of the firm’s relocation costs. With more time periods, tax competition induces firm relocation sooner than in its absence.