Profit-shifting and measured productivity of multinational firms


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.

Research Highlight 2008

How are productivity comparisons affected by profit shifting?

A significant amount of economic research has identified that multinational firms are more productive than purely domestic firms. But this research does not take into account that measured productivity differentials may be affected by profit shifting. If multinationals are able to shift income to lower-taxed countries, then the measured differential would be higher in low-taxed countries and lower in high-taxed countries. Comparing the differential in productivity between these two groups of firms across countries makes it possible to identify whether the measured differential is affected by taxes. Using data on around 16,000 companies, this project finds that, on average, a ten percentage-point cut in the statutory corporate tax rate in a country would increase the measured differential by 44%. The differential is therefore very sensitive to the tax rate. This suggests that comparisons in the productivity of multinational firms and domestic firms should be treated with some care.


Giorgia Maffini and Socrates Mokkas