International presentation
Aug 30, 2019

Economic integration and agglomeration of multinational production with transfer pricing

ERSA 59th Congress
  • Hirofumi Okoshi

Event date
Aug 27, 2019 - Aug 30, 2019
Presentation type
Oral presentation (general)
European Regional Science Association, University of Lyon
University of Lyon

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 affliates. In the beginning of integration, MNEs' plants are concentrated in the low-tax country, and in the later stage, this location pattern reverses. High taxes may favor multinational production; but it does not guarantee greater tax revenues. We also analyze tax competition between two unequal-sized countries and show that profit shifting leads to tougher competition.