Competition for FDI and Profit Shifting

27 Pages Posted: 27 Jan 2015

See all articles by Jie Ma

Jie Ma

University of International Business and Economics (UIBE) - School of International Trade and Economics

Pascalis Raimondos

Queensland University of Technology - School of Economics and Finance; Copenhagen Business School - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 26, 2015

Abstract

When countries compete for the location of a new multinational plant they need to be aware of the profit shifting opportunities this new plant creates for the global multinational firm. By modelling explicitly the multinational’s intra-firm transactions, we show that the home market advantage that large countries have due to their size will be counteracted by such profit shifting opportunities. As a result of this, large countries will not be able to capitalize on their size and sustain high corporate taxes. We show that, on the basis of these profit shifting opportunities, a small country can easily win the location game ahead of a large country. How lenient the small country is in implementing transfer pricing regulations turns out to be an important variable in such location games.

Keywords: profit shifting, competition for FDI, location game

JEL Classification: H250, F230

Suggested Citation

Ma, Jie and Raimondos, Pascalis, Competition for FDI and Profit Shifting (January 26, 2015). CESifo Working Paper Series No. 5153, Available at SSRN: https://ssrn.com/abstract=2555537

Jie Ma

University of International Business and Economics (UIBE) - School of International Trade and Economics ( email )

10 East Huixin Street
Chaouang District
Beijing, 100029
China

Pascalis Raimondos (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

Copenhagen Business School - Department of Economics ( email )

Solbjergs Plads 3
DK-2000 Frederiksberg C
Denmark
+45 38 152 594 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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