TAXES AND THE LOCATION OF PRODUCTION - EVIDENCE FROM A PANEL OF US MULTINATIONALS

This paper considers the factors that influence the locational decisio ns of multinational firms. A model in which firms produce differentiat ed products in imperfectly competitive markets is developed, in the sp irit of Horstmann and Markusen (1992). Firms choose between a number o f foreign locations; the outside options of exporting to or not servin g the foreign market an explicitly modelled. Particular attention is p aid to the impact of profit taxes, the separate roles of effective ave rage and marginal tax rates are identified. The model is applied to a panel of US firms locating in the European market. Agglomeration effec ts are found to be important. The effective average tax rate plays a r ole in the choice between locations, but not in the choice of whether to locate production in Europe compared with one of the outside option s. (C) 1998 Published by Elsevier Science S.A.