Competition in Taxes and Performance Requirements for Foreign Direct Investment

Abstract

Tax incentives offered to attract firms engaged in foreign direct investment are often tied to performance requirements such as domestic content restrictions. The tax competition literature has repeatedly shown that competition between municipalities for mobile firms tends to drive taxes to low levels. One would expect a comparable result for burdensome performance requirements. Despite this, the evidence suggests that while taxes have indeed been driven down, performance requirements are as popular as ever. We explain this seeming conundrum by showing that in the presence of spillovers, binding performance requirements can act as a coordination device for firms. In equilibrium, municipalities choose performance requirements which maximize joint surplus from investment. Competition between municipalities then transfers this surplus to firms via tax subsidies. JEL Classification: F21, F23, H25.

Local content requirements in the petroleum sector in Tanzania: A thorny road from inception to implementation?

“…The main objectives are to ensure that more Tanzanians are employed in the petroleum sector and that local companies become suppliers to this industry (GoT 2014a). Local content requirements are considered to be among the most important tools for extracting additional benefits to local communities from foreign investments in the extractive sectors and have been in use in most carbon rich countries (Davies andEllis 2007 andTordo et al 2013, see also Kjaer 2013, Ovadia, 2016. However, LCPs are controversial as they may entail a redistribution of benefits that often trigger rent seeking, corruption and non-productive lobbying (Hansen et al 2015, Kolstad andKinyondo 2015).…”

Hide and seek: evasion and search as FDI motivation

“…This type of evasion is likely to occur between developed nations and over relatively short distances (Sleuwaegen and Pennings, 2001). A substantial literature on inter-jurisdictional competition to attract mobile firms concludes that it tends to drive corporate tax rates downwards (Davies and Ellis, 2007). However, the evidence that MNEs will engage in FDI simply to avoid paying tax in the origin is not uniform.…”

Developing Country Second-Mover Advantage in Competition Over Environmental Standards and Taxes

“…developing country (as in c and d) purely through strategic interaction between governments in their competition for firms and not as a result of attempts by governments to regulate the environment on behalf of consumers/citizens. 10 The key strategic consideration that drives our results is that the developed country wants to bring about an outcome in which the developing country is prepared to 'share' the mobile firms rather than undercut the developed country and attract them both. To do so, the developed country must put the developing country in a situation where it can earn higher rents by sharing firms than by undercutting.…”

“…As mentioned above, competition between jurisdictions over standards and taxes has already received some attention in the literature. For example, Oates and Schwab (1998) 10 The issue of governments setting environmental standards too high, in order to dissuade a noxious production facility from locating in their jurisdictions, is referred to as 'not in my back yard' or NIMBY, and brings about a 'race to the top'. NIMBY has been studied by Levinson (1999a,b) among others.…”