Essays on firms in the global economy

Abstract

This thesis explores how taxes and subsidies can influence the decisions of strategic firms acting in the global economy. Chapter 1 considers tax/subsidy competition for a multinational enterprise (MNE) between the governments of two potential host countries. It is shown that the MNE's decision to locate in the proximity of firms producing a homogeneous product may be the result of government subsidies that aim to capitalise on the potential for knowledge spillovers to indigenous industry; and that fiscal competition to host the MNE may increase the welfare of both winning and losing countries when it leads to the relocation of multinationals away from countries that do not have the potential to benefit from knowledge spillovers to countries that do. Chapter 2 analyses the impact of anti-profit-shifting policies in a model with competition for an MNE's production plant and its profits between two governments that have at their disposal two fiscal policy instruments. It is shown that any gains in tax revenues resulting from more costly profit shifting may be partly offset by higher subsidies in the bidding stage for the MNE's plant such that the positive impact of anti-tax avoidance policies on host countries' tax revenues may be smaller than anticipated. [Continues.]