Tax competition among countries
There are a few different considerations that businesses consider before expanding into outside countries.
The first of course is, what does that country’s marketplace look like for their given product or similar products? If there is no current market for this product, could there be one or is there a reason no market exists? Maybe this culture has no use for the widget your company is looking to export. If there is a market, what does the competition look like? How many existing firms are in the area? What do their products look like? What are the barriers to entry for new businesses?
One of the primary barriers to entry for businesses looking to expand to outside countries is any given country’s tax code.
Tax codes can be extremely uncompetitive or extremely competitive and they can be a major influencer for whether or not a business will expand in your territory. For example, let’s take the case of Germany because that is where I first started my marketing ventures. If a business is looking to expand into the Germany marketplace but Germany’s taxing and business climate is very unfriendly towards new businesses, the firm may opt to build their new research center in Austria instead. They have similar enough clientele and it would be much easier to get into the German marketplace from Austria than it would be from the United States. So, in effect, Germany will now have access to the all of the good that will be produced by the company looking to expand but none of the jobs relating to those goods.
This problem becomes especially evident in countries like the United States that are broken into 50 state territories that are all sovereign political entities under the umbrella of one federal government. States must enforce federal laws, but they can choose to go further in the case of taxation. What you now find in America is a massive migration of both the populace and businesses into the states with lower tax rates. States like California are losing residents to states like Texas that are quickly becoming the giant technology leaders.
The best thing that countries and states can do to avoid this type of mass migration exodus is to make their tax rates competitive with their neighbors. If you keep your tax rate competitive and do not allow yourself to have artificially high tax rates relative to the country’s surrounding you, you will be able to attract more businesses looking to expand. One option that shouldn’t be pursued, however, is cutting special deals with select businesses. This discourages other businesses from entering the marketplace because they are unable to get these same deals. It also adds to the level of uncertainty in the marketplace where businesses cannot be certain if tax rates on their company or industry will remain steady. Businesses generally look for predictability in a business climate because it allows them to develop strategies for their own expansion.
So the important take away from this is to remember when looking to expand your business into foreign markets, take a look at the business climate in those countries. Even if you want to get into marketplace “A,” opting to set up operations in marketplace “B” is sometimes the better alternative.