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Profit Shifting and Measured Productivity of Multinational Firms

Authors


  • The authors thank the editor, an anonymous referee, Wiji Arulampalam, Steve Bond, Thiess Buettner, Michael Devereux, Chris Heady, Clemens Fuest, Jenny Ligthart, Simon Loretz, Brian Poi and Alfons Weichenrieder for helpful comments as well as seminar participants at the Said Business School (Oxford University), the University of Warwick, the 2009 Annual Conference of the Royal Economic Society and the 2009 Annual Conference of the International Institute of Public Finance (IIPF). Financial support from the ESRC (ES/E003540/1) is gratefully acknowledged. An earlier version of the article was circulated under the title ‘Transfer-Pricing and Measured Productivity of Multinational Firms’.

Abstract

The global integration of production cuts costs and taps new sources of skills and knowledge

(Samuel Palmisano (2006), IBM Chairman, President and CEO on the evolution of multinationals)

Abstract

This article examines the differences in total factor productivity (TFP) between multinationals and domestic firms before and after tax rate changes. The aim is to investigate whether the host country corporate tax rate has a significant influence on the measured TFP advantage of multinational companies. Using a sample of approximately 16,000 European manufacturing firms (1998–2004), we find that a cut by 10 percentage points in the statutory corporate tax rate would increase multinationals’ measured TFP by about 10% relative to domestic firms, consistent with profit shifting by multinationals. At the sample mean, this would imply a 44% increase in the TFP advantage of multinationals.

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