DP5875 | Where Do Firms Incorporate?

Publication Date

08/10/2006

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Abstract

Over the last few years, a series of rulings by the European Court of Justice (ECJ) has opened up the European Union to cross-border mobility in incorporation. In this paper we explore how deregulation and the costs of regulation have affected the location decisions of firms. Using a newly constructed dataset of companies from around the world incorporating in the U.K. between 1997 and 2005 we find a large increase in new incorporations of limited liability firms from E.U. Member States following the ECJ rulings. We find that incorporation costs, in particular minimum capital requirements, and delays in incorporation are significant influences on firms? location decisions. Our results confirm the relevance of price to firms? choice of legal systems. We also report that cross-border incorporation has prompted regulatory competition between E.U. Member States to provide low-cost corporate law to limited liability companies.