55th Congress of the European Regional Science Association: "World Renaissance: Changing roles for people and places", 25-28 August 2015, Lisbon, Portugal
It would not take a long time for a firm to determine factory's location when the firm's production activity was almost confined in a country. While, in the globalized economy a firm takes a series of steps to decide factory's location since spatial range of a firm's production activity is expanded to a large geographical area in which several countries are contained. Nowadays, as a firm plans to establish a new factory, it faces the issue of country selection and site choices within the selected country. To decide factory's location a firm proceeds location determination processes deliberating various location factors. Especially, the corporation tax and the interest rates of countries are important location factor in the early stage of the location determination process since they decisively affect the firm's profits. In addition, in the globalized economy a new mechanism begins to work in firm's production management, the function of the transfer price of intermediate goods: Many manufacturing firms fragment production process into several blocs and scatter the fragmented blocs across countries. Thus, intermediate goods produced by each factory are moved between the factories which are located in different countries. In the movement of these goods the transfer price is utilized. Because the firm can measure each factory's profit by using the transfer price and estimate each factory's profit contribution to the firm. While, the country in which factory locates can charge the corporation tax on the factory's profit that is grasped by the transfer price. This paper analyzes the effects of the corporation tax rate and the interest rate on the firm's location decision through the transfer price function. By using a numerical simulation method, this paper clearly shows that the corporation tax rate and the interest rate play decisive role in settling the spatial range in which the location of a factory is prospective, furthermore, these rates influence not only firm's region selections but also site choices within the selected region. The corporation tax rate and the interest rate which are manipulated by the government and the central bank play the more important role in the determination of factory's location. This paper suggests that when the government and the central bank settle the corporation tax rate and the interest rate, they should pay attention to these factors' location power.