Economic Integration and Agglomeration of Multinational Production with Transfer Pricing

MPRA Paper from University Library of Munich, Germany

Abstract: Do low corporate taxes always favor multinational production in the course of eco- nomic integration? To investigate this, we propose a two-country model in which multi- nationals choose the locations of production plants and foreign distribution affiliates and shift profits between home plants and foreign affiliates by manipulating transfer prices in intra-firm trade. We show that when trade costs are high, plants are concentrated in the low-tax country; surprisingly, this location pattern reverses when they are low. Unlike existing models with single-plant firms, the impact of economic integration is non-monotonic: a fall in trade costs first decreases and then increases the share of plants in the high-tax country, which we empirically confirm. We also analyze tax competition and find that allowing for transfer pricing makes competition tougher. This indicates that international coordination on transfer-pricing regulation can potentially make the world better off.

Keywords: Profit shifting; Multinational firms; Intra-firm trade; Trade costs; Foreign direct investment (FDI) (search for similar items in EconPapers)
JEL-codes: F12 F23 H25 H26 (search for similar items in EconPapers)
Date: 2021-12-21
New Economics Papers: this item is included in nep-cwa and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: ECONOMIC INTEGRATION AND AGGLOMERATION OF MULTINATIONAL PRODUCTION WITH TRANSFER PRICING (2022)
Working Paper: Economic Integration and Agglomeration of Multinational Production with Transfer Pricing (2022)
Working Paper: Economic Integration and Agglomeration of Multinational Production with Transfer Pricing (2022)
Working Paper: Economic Integration and Agglomeration of Multinational Production with Transfer Pricing (2021)
Working Paper: Economic Integration and Agglomeration of Multinational Production with Transfer Pricing (2021)
Working Paper: Economic Integration and Agglomeration of Multinational Production with Transfer Pricing (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:111188

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