Transfer Prices, Tariffs, and Content Restrictions

Madan, Vibhas

doi:10.1111/1467-9396.00131

“…While to our knowledge there is no work examining competitively set performance requirements, the interaction between foreign firms operating under performance requirements and domestic firms has received considerable attention. Grossman (1981), Richardson (1991), Fung (1994), and Madan (1998) are amongst the contributors to this rich literature. They all study mechanisms by which the choices of multinational firms can impact the profitability and performance of domestic firms.…”

mentioning

confidence: 99%

Competition in taxes and performance requirements for foreign direct investment

Davies

¹

,

Ellis

²

2007

European Economic Review

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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.

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“…Grossman (1981), Richardson (1991), Fung (1994), and Madan (1998) are amongst the contributors to this rich literature. They all study mechanisms by which the choices of multinational firms can impact the profitability and performance of domestic firms.…”

mentioning

confidence: 99%

Competition in Taxes and Performance Requirements for Foreign Direct Investment

Davies

¹

,

Ellis

²

2003

View full text Add to dashboard Cite

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.

show abstract