COMPETING FOR FOREIGN DIRECT INVESTMENTS: A REAL OPTIONS APPROACH

Transcription

1 COMPETING FOR FOREIGN DIRECT INVESTMENTS: A REAL OPTIONS APPROACH PAOLO M. PANTEGHINI GUTTORM SCHJELDERUP CESIFO WORKING PAPER NO. 929 CATEGORY 1: PUBLIC FINANCE APRIL 2003 An electronic version of the paper may be downloaded from the SSRN website: from the CESifo website:

2 CESifo Working Paper No. 929 COMPETING FOR FOREIGN DIRECT INVESTMENTS: A REAL OPTIONS APPROACH Abstract This paper uses the Bad News Principle to study how the ability of multinationals to shift profits by transfer pricing affects both the timing of foreign direct investment decisions and government tax policy. A main finding of the paper is that if countries compete to attract foreign direct investments, only weak conditions are needed to establish that welfare is higher when firms can postpone irreversible investments as opposed to when they cannot. JEL Code: H25. Keywords: corporate taxation, irreversibility, MNE, real options and uncertainty. Paolo M. Panteghini University of Brescia Department of Economics Via San Faustino 74/B Brescia Italy panteghi@eco.unibs.it Guttorm Schjelderup Norwegian School of Economics and Business Administration Economics Department R 307 Helleveien Bergen Norway guttorm.schjelderup@nhh.no The authors are grateful to Carlo Scarpa and Hans Jarle Kind for helpful comments and suggestions. The usual disclaimer applies.

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21 CESifo Working Paper Series (for full list see Edward Castronova, Theory of the Avatar, February Robert S. Chirinko, Hans van Ees, Harry Garretsen, and Elmer Sterken, Investor Protections and Concentrated Ownership: Assessing Corporate Control Mechanisms in the Netherlands, February Bernard M.S. van Praag and Pedro Cardoso, The Mix Between Pay-as-you-go and Funded Pensions and what Demography has to do with it, February Ernst Fehr, Urs Fischbacher, Bernhard von Rosenbladt, Jürgen Schupp, and Gert G. Wagner, A Nation-Wide Laboratory. Examining Trust and Trustworthiness by Integrating Behavioral Experiments into Representative Survey, February Frank Heinemann, The Inflationary Impact of Wage Indexation, February Eytan Sheshinski, Bounded Rationality and Socially Optimal Limits on Choice in a Self-Selection Model, February M. Hashem Pesaran, Estimation and Inference in Large Heterogenous Panels with Cross Section Dependence, February Luis H. R. Alvarez and Erkki Koskela, On the Tree-Cutting Problem under Interest Rate and Forest Value Uncertainty, February Norbert Berthold and Rainer Fehn, Unemployment in Germany: Reasons and Remedies, February Clemens Fuest, Bernd Huber, and Philipp Tilleßen, Tax Policy and Entrepreneurship in the Presence of Asymmetric Information in Capital Markets, February Eytan Sheshinski, Optimum and Risk-Class Pricing of Annuities, February Willi Leibfritz, Paul O Brien and Jean-Christophe Dumont, Effects of Immigration on Labour Markets and Government Budgets An Overview, February M. Hashem Pesaran and Allan Timmermann, How Costly is it to Ignore Breaks when Forecasting the Direction of a Time Series?, February Thorvaldur Gylfason and Gylfi Zoega, Education, Social Equality and Economic Growth: A View of the Landscape, February Robin Boadway and Jean-François Tremblay, Public Economics and Startup Entrepreneurs, February 2003

22 878 Erkki Koskela and Roope Uusitalo, The Un-Intended Convergence: How the Finnish Unemployment Reached the European Level, February Robert Fenge and Volker Meier, Pensions and Fertility Incentives, February Eytan Sheshinski, Note on Income Taxation and Occupational Choice, February A B Atkinson, Income Inequality in OECD Countries: Data and Explanations, February Thomas Gehrig and Rune Stenbacka, Venture Cycles: Theory and Evidence, February Ralf Becker and Thomas Hellmann, The Genesis of Venture Capital - Lessons from the German Experience, March Eytan Sheshinski, Note on the Optimum Pricing of Annuities, March Paul De Grauwe and Magdalena Polan, Globalisation and Social Spending, March F. van der Ploeg, Do Social Policies Harm Employment and Growth?, March Mirjam van Praag, Initial Capital Constraints Hinder Entrepreneurial Venture Performance: An empirical analysis, March Bernard Steunenberg, Coordinating Sectoral Policymaking: Searching for Countervailing Mechanisms in the EU Legislative Process, March Eytan Sheshinski, Optimum Delayed Retirement Credit, March Frederick van der Ploeg, Rolling Back the Public Sector Differential effects on employment, investment and growth, March Paul De Grauwe and Marc-Alexandre Sénégas, Monetary Policy in EMU when the Transmission is Asymmetric and Uncertain, March Steffen Huck and Kai A. Konrad, Strategic Trade Policy and the Home Bias in Firm Ownership Structure, March Harry Flam, Turkey and the EU: Politics and Economics of Accession, March Mathias Hoffmann and Ronald MacDonald, A Re-examination of the Link between Real Exchange Rates and Real Interest Rate Differentials, March Badi H. Baltagi, Espen Bratberg, and Tor Helge Holmås, A Panel Data Study of Physicians Labor Supply: The Case of Norway, March Dennis C. Mueller, Rights and Citizenship in the European Union, March Jeremy Edwards, Gains from Trade in Tax Revenue and the Efficiency Case for Trade Taxes, March 2003

23 898 Rainer Fehn and Thomas Fuchs, Capital Market Institutions and Venture Capital: Do They Affect Unemployment and Labour Demand?, March Ronald MacDonald and Cezary Wójcik, Catching Up: The Role of Demand, Supply and Regulated Price Effects on the Real Exchange Rates of Four Accession Countries, March R. Selten, M. Schreckenberg, T. Pitz, T. Chmura, and S. Kube, Experiments and Simulations on Day-to-Day Route Choice-Behaviour, April Stergios Skaperdas, Restraining the Genuine Homo Economicus: Why the Economy Cannot be Divorced from its Governance, April Yin-Wong Cheung, Menzie D. Chinn, and Antonio Garcia Pascual, What Do We Know about Recent Exchange Rate Models? In-Sample Fit and Out-of-Sample Performance Evaluated, April Mika Widgrén, Enlargements and the Principles of Designing EU Decision-Making Procedures, April Phornchanok Cumperayot, Dusting off the Perception of Risk and Returns in FOREX Markets, April Kai A Konrad, Inverse Campaigning, April Lars P. Feld and Stefan Voigt, Economic Growth and Judicial Independence: Cross Country Evidence Using a New Set of Indicators, April Giuseppe Bertola and Pietro Garibaldi, The Structure and History of Italian Unemployment, April Robert A.J. Dur and Otto H. Swank, Producing and Manipulating Information, April Christian Gollier, Collective Risk-Taking Decisions with Heterogeneous Beliefs, April Alexander F Wagner, Mathias Dufour, and Friedrich Schneider, Satisfaction not Guaranteed Institutions and Satisfaction with Democracy in Western Europe, April Ngo Van Long, Raymond Riezman, and Antoine Soubeyran, Trade, Wage Gaps, and Specific Human Capital Accumulation, April Andrea Goldstein, Privatization in Italy : Goals, Institutions, Outcomes, and Outstanding Issues, April Rajshri Jayaraman and Mandar Oak, The Signaling Role of Municipal Currencies in Local Development, April 2003

24 914 Volker Grossmann, Managerial Job Assignment and Imperfect Competition in Asymmetric Equilibrium, April Christian Gollier and Richard Zeckhauser, Collective Investment Decision Making with Heterogeneous Time Preferences, April Thomas Moutos and William Scarth, Some Macroeconomic Consequences of Basic Income and Employment Subsidies, April Jan C. van Ours, Has the Dutch Miracle Come to an End?, April Bertil Holmlund, The Rise and Fall of Swedish Unemployment, April Bernd Huber and Marco Runkel, Optimal Design of Intergovernmental Grants under Asymmetric Information, April Klaus Wälde, Endogenous Business Cycles and Growth, April Ramon Castillo and Stergios Skaperdas, All in the Family or Public? Law and Appropriative Costs as Determinants of Ownership Structure, April Peter Fredriksson and Bertil Holmlund, Improving Incentives in Unemployment Insurance: A Review of Recent Research, April Bernard M.S. van Praag and Adam S. Booij, Risk Aversion and the Subjective Time Discount Rate: A Joint Approach, April Yin-Wong Cheung, Dissecting the PPP Puzzle: The Unconventional Roles of Nominal Exchange Rate and Price Adjustment, April Ugo Trivellato and Anna Giraldo, Assessing the Choosiness of Job Seekers. An Exploratory Approach and Evidence for Italy, April Rudi Dornbusch and Stanley Fischer, International Financial Crises, April David-Jan Jansen and Jakob de Haan, Statements of ECB Officials and their Effect on the Level and Volatility of the Euro-Dollar Exchange Rate, April Mario Jametti and Thomas von Ungern-Sternberg, Assessing the Efficiency of an Insurance Provider A Measurement Error Approach, April Paolo M. Panteghini and Guttorm Schjelderup, Competing for Foreign Direct Investments: A Real Options Approach, April 2003