DP5984 Tax Competition and the International Distribution of Firm Ownership: An Invariance Result

Author(s): Ben Ferrett , Ian Wooton

Publication Date: December 2006

Keyword(s): tax/subsidy competition , foreign direct investment , international distribution of firm ownership

JEL(s): F12 , F23 , H25 , H73

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP5984.asp.asp

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.