Corporate Taxation and Multinational Activity

Under the assumption that public infrastructure reduces the fixed factor
requirement of firms headquartered in a given country, the fixed costs of setting
up a national firm in country i are

FCn _ ^2wSi ^{+ w}Li
FCi = (Ii + 1)^{β ,}

where β > 0 is a scaling parameter. Similarly, the fixed costs for horizontal
and vertical multinationals are then reduced by the public infrastructure in the
relevant country

FC h ₌ (2 ^{+ θ} ) ^wSi ^{+ w}Li . (¹⁺ Y ) ^wLj

Ci           ( Ii + 1)^{β     +} ( Ij + 1)^β

FC v ₌ (2 ^{+ θ} ) ^wSi , (¹⁺ Y ) ^wLj

FCi        (Ii + 1)^{β +} (Ij + 1)^β ■

3.4 Model parameterization

Due to the non-linearities and the numerous possible corner solutions, an an-
alytical solution of the model is infeasible (see Markusen and Venables, 1998,
2000; Markusen, 2002). Therefore, we derive the empirically testable hypothe-
ses of interest by means of numerical simulation, using the following parameter
values. World factor endowments are set at L = 200 and K = 50. a = 0■ 9 for
the skilled labor coefficient in the CES technology of Z. The production of the
differentiated X-good is relatively more skilled labor intensive with fixed input
coefficient of a_LX = 0■ 75 and a_SX = 0■ 25 (see Markusen, 2002). We parame-
terize the additional effort of transferring knowledge abroad with θ = 0■ 1 and
the additional resources required for setting up a plant abroad with γ = 0■ 1.
According to the United Nation’s World Trade Database, the share of man-
ufacturing goods trade in the 1990s is about 70 to 80 percent of total trade.
Therefore, we assume an expenditure share for manufactures of μ = 0■ 8. We
consider σ = 4 as value for the elasticity of substitution, which is close to the
one usually applied in the knowledge-capital literature (see Markusen, 2002).
Trade costs are assumed to be high with τ = 0■ 25 being in line with Carr,
Markusen, and Maskus (2001). Finally, the elasticity of substitution in the
production of the homogeneous good is (1/(1 - ρ)) = 3.

Concerning the public sector, we initially set the corporate tax rates sym-

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