Working Paper: CEPR ID: DP5984
Authors: Ben Ferrett; Ian Wooton
Abstract: Intuition suggests that the international distribution of firm ownership ought to affect tax/subsidy competition for mobile plants. One might expect that the greater the share of a firm owned within a potential host country that offers a relatively profitable production location, the more that nation will be prepared to pay to attract the firm's production facility. We show this intuition to be false. In equilibrium, both plant location and the tax/subsidy offers are independent of the international distribution of ownership. The reason is that the tax/subsidy competition equalises the firm's post-tax profits across countries, making owners of capital indifferent towards the location of production.
Keywords: Foreign Direct Investment; International Distribution of Firm Ownership; Tax-Subsidy Competition
JEL Codes: F12; F23; H25; H73
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| international distribution of ownership (F23) | equilibrium location of the firm's plant (R30) |
| international distribution of ownership (F23) | equilibrium tax-subsidy offers (H23) |
| tax-subsidy competition (H20) | post-tax profits across countries (H29) |
| equilibrium location of the firm's plant (R30) | indifference of capital owners to location of production (F29) |
| equilibrium tax-subsidy offers (H23) | indifference of capital owners to location of production (F29) |