Economic Integration and Agglomeration of Multinational Production with Transfer Pricing

39 Pages Posted: 22 Apr 2019 Last revised: 20 Jan 2020

Date Written: April 4, 2019

Abstract

Do low corporate taxes always favor multinational production in the course of economic integration? We build a two-country spatial model with different corporate tax rates in which multinational enterprises (MNEs) can manipulate transfer prices in intra-firm trade. Using transfer pricing, MNEs can shift profits between domestic production plants and foreign distribution affiliates. In the initial stage of integration, more MNEs locate their production plants in the low-tax country, and then in the later stage, this location pattern reverses. Contrary to conventional wisdom, high taxes may favor multinational production, which does not yet necessarily bring greater tax revenues. The results have implications for empirical studies and tax competition between unequal-sized countries.

Keywords: Transfer price; Production location; Economic integration; Intra-firm trade; Economic geography

JEL Classification: F12; F23; H25; H26

Suggested Citation

Kato, Hayato and Okoshi, Hirofumi, Economic Integration and Agglomeration of Multinational Production with Transfer Pricing (April 4, 2019). Available at SSRN: https://ssrn.com/abstract=3365385 or http://dx.doi.org/10.2139/ssrn.3365385

Hayato Kato (Contact Author)

Osaka University ( email )

1-7 Machikaneyama
Toyonaka, Osaka 5600043
Japan

HOME PAGE: http://https://hayatokato.weebly.com/

Hirofumi Okoshi

Okayama University ( email )

1-1-1 Tsushimanaka, Kita Ward
Okayama, 700-0082
Japan
+81 86 251 7525 (Phone)

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