This paper considers the factors that influence the locational decisions of multinational firms. A model in which firms produce differentiated products in imperfectly competitive markets is developed, in the spirit of . Firms choose between a number of foreign locations; the outside options of exporting to or not serving the foreign market are explicitly modelled. Particular attention is paid to the impact of profit taxes; the separate roles of effective average and marginal tax rates are identified. The model is applied to a panel of US firms locating in the European market. Agglomeration effects are found to be important. The effective average tax rate plays a role in the choice between locations, but not in the choice of whether to locate production in Europe compared with one of the outside options.
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Authors
Michael Devereux
Michael joined the IFS in 1982 and he has been a Research Fellow since 1990 and a Professor of Economics at the University of Oxford.
Rachel Griffith
Rachel is Research Director and Professor at the University of Manchester. She was made a Dame for services to economic policy and education in 2021.
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