How Low Business Tax Rates Attract Multinational Headquarters: Municipality-Level Evidence from Germany



host only a small number of headquarters. Therefore, we employ count data
models to estimate the impact of business taxation on the number of foreign
MNE headquarters located in a municipality, controlling for other determi-
nants such as population characteristics, the skill level of the work force, and
geographical characteristics. More specifically, we estimate cross-sectional
and panel data models, where business tax rates are treated as exogenous
or endogenous. Across the board, we identify a negative impact of business
tax rates on the number of MNE headquarters in a municipality which is
significantly different from zero. The magnitude of the impact seems reason-
able: a reduction of one percent of the municipal tax rate is related to an
increase in the expected number of headquarters hosted by the municipality
of about 450% in the preferred model. For the average municipality, the lat-
ter is equivalent to an increase in the number of foreign MNE headquarters
by 0.05. In other words, the average municipality would have to lower its
business tax rate by about 20% (or 2.8 percentage points) to attract only
one headquarters of a foreign MNE. When accounting for the endogeneity of
tax rates the marginal impact of business taxation is somewhat higher.

The remainder of the paper is organized as follows. We summarize the
literature on determinants of regional headquarters in section 2. Section 3
describes features of the data-set. Section 4 introduces the empirical strategy
for the analysis of the impact of business taxes on the number of MNE
headquarters in a municipality. Section 5 summarizes the empirical findings
from both cross-section and panel data analysis. The last section provides
some concluding remarks.

2 Determinants of MNE regional headquar-
ters location

In our empirical analysis, we estimate parsimonious models of the number
of regional headquarters set up in German municipalities. As suggested by
previous research on the impact of profit (or capital) taxation on lumpy
investment decisions by MNEs, we expect higher business tax rates levied
by municipalities to exert a negative impact on the number of headquarters.
However, to isolate their role on MNEs’ location decisions, we have to control
for other key explanatory variables suggested by the literature. These are
the following.



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