Discussion Paper No.236

Locational power of thecorporation tax and the interest rate
in highly globalized economy
Toshiharu Ishikawa
Faculty of Economics Chuo University
October 2014

６6HPasdfasdfaksjdfasfINSTITUTE OF ECONOMIC RESEARCH
Chuo University
Tokyo, Japan

Locational power of the corporation tax and the interest rate in highly globalized economy

Toshiharu Ishikawa

Faculty of Economics Chuo University
Hachioji Tokyo, 192-0393, Japane-mail: ishiy@tamacc.chuo-u.ac.jp

Abstract
As firms’ activities are expanded to cover the whole world, new mechanism begins to work in a
firm’s production activity, and some economic elements which were not taken into consideration as alocation factor become to influence factory’s location selections. The typical examples are a functionof the transfer price of intermediate goods in movements between a firm’s factories that are locatedin different countries, and locational effects of the corporation tax and the interest rate which aremanipulated by the government and the central bank. This paper analyzes the effects of thecorporation tax rates and the interest rates of countries on the location decision of a firm through atransfer price function. This analysis shows that the corporation tax rate and the interest rate direct
the spatial area in which location of a factory is prospective and the transfer price level. It will beshown in the analysis that the corporation tax rate and the interest rate intervene into the selection of
the country by a manufacturer, furthermore, they play an important role in determination of thelocation site in the selected country. The analysis will offer a significant suggestion to policy makers
in a country that the corporation tax and the interest rate are important location factor when theadministration induces firms from foreign countries to vitalize the certain regions.

JEL: R30
Keywords: Corporation tax rate, Interest rate, Transfer price, Firm’s location,
Location prospective area, Chaotic phenomenon

1Locational effect of corporation tax and interest rate through transfer price1

Introduction

It would not take a long time for firm to determine its factory’s location when firm’s production
activity is confined in a country. While, in the highly globalized world firm takes a series ofprocesses to decide factory’s location since its production activity is conducted in a large
geographical area where several countries are contained. In this situation, as firm plans to establish a
new factory, it faces the issues of country selection and then site selection within the selected country.
To decide factory’s location the firm proceeds carefully location determination processes
deliberating various location factors in which the corporation tax and the interest rates of thecountries are included that were not picked up as the location factor in the pro-globalization.
In these days firm fragments its production process into several blocs and scatters fragmented
blocs across countries1. The intermediate goods produced at a factory are moved to another factoryby using the transfer price2. There are two primary reasons why the transfer price is used by firm:
One is that since firm measures the factory’s profit by utilizing this price, the firm can estimate thefactor’s profit contribution to the firm’s total profits. The other is that the country in which factory
locates charges the corporation tax on the factory’s profit that is determined by using the transfer
price.
In the globalized economy, a manufacturing firm, which makes final goods from the intermediate
goods produced by its factories, usually selects a country and choses a place within the selected
country as it establishes new factory. In location determination processes the transportation costs,
wage rates, agglomeration economies are considered as the fundamental location factor. The firmpays attention these factors. In addition, the firm considers the corporation tax and the interest rates
of countries because these rates influence not only the country selection but also the determination of
the location site within the selected country. The main purpose of the present paper is to analyze thelocational power of the corporation tax and the interest rate through the function of the transfer price.
This paper is organized as follows: In the next section the assumptions and framework are
introduced. And the profit function of a firm will be derived. And then, explains that the first stage ofthe location determination processes is to set up a location prospective area. In order to define thelocation prospective area chaotic phenomenon is used. In section 3 the locational power of thecorporation tax and interest rate are analyzed in a certain transportation costs of the intermediate
goods. Section 4 concludes the analysis.

1

Shi-Yan(1995)analyses the reasons and the mechanism of fragmentation and spatial departure of
production activity.
2
The transfer price has been extensively studied by Hirshleifer (1956), Eden (1985) and Dobbs(2000).
22. Location decision-making and optimal transfer price
2.1 Derivation of the profit function of a firm
The following assumptions are placed and the framework for the analysis is constructed. A firm
produces goods by using two production processes, the first process and the second process. The
first process is conducted by factory 1 which manufactures intermediate goods, mq, in the homecountry. The intermediate goods are transported the factory1 to factory 2 by the transfer price mp.
The factory 2 locates at a market place in a foreign country. The factory 2 uses one unit of theintermediate goods to produce one unit of the final goods. And the factory 2 sells the finished goods
by the price p to the market and it determines the quantity of the final goods in order to maximize theprofits of the factory 2. While, the factory 1 decides the transfer price in order to maximize the total
profits of the firm. The tax rates of the home and the foreign country are represented by t and t*,
respectively. In addition, the interest rates of the home and the foreign country are indicated by r and
r*. At the first stage of the analysis the interest rates are not incorporated into the consideration forthe simplification. Their effects will be examined at the second stage of the analysis.
Now, the profit of the factory 1 is given by equation (1)Y1 = (1- t)[ mp * mq – C(mq)－F1](1)where mq is quantity of the intermediate goods, C(mq) is the cost function and F1 is fixed costs.
The
cost function C(mq) of the factory 1 is derived on the basis of the following assumptions: The
factory 1 uses two different kinds of materials m1, m2 to produce the intermediate goods mq. And
the factory 1 uses lubricating oil m3 to operate machines, The materials m1, m2 and oil m3 areproduced at points M1, M2 and M3 which are identified by coordinates（x1, y1）, (x2,y2), (x3,y3),respectively, on a large plain space. These materials are transported to the factory 1 at point L
which is indicated by (x, y). Freight rates of the materials m1, m2 are denoted by tm, and the rate of
the oil m3 is given by te. Mill prices of these are shown by p1, p2, and p3, and these prices are given.
The intermediate goods are transported from the factory 1 to the factory 2 which locates at themarket at point M4（x4,y4). The freight rate of the intermediate goods mq is tg. Figure 1 illustrates
the geographical relationship between the factory 1, the factory 2, the market and the points of thethree materials. The territory of the home country is indicated by oval curve, and that of the foreigncountry is given by the square.

3

Figure 1 Location figure of factories
Foreign countryy■M4(market, factory 2)d4◎ L (X,Y ) (factory 1)

d1

0

x

d2
▲

●

d3

M2 (m2)M1 (m1)◙ M3 (m3)Home country

The production function of the factory1 is represented by equation (2):mq= Am1αm2β(2)where A, α and β are parameters and they are defined as A>0, 0<(α+β)<1. The distances between thematerial places, Mi ( i=1, 2, 3 ) and the factory1, L(x, y) are represented by d1, d2 d3, respectively:d1＝((x – x1 )2 + (y + y1)2)0.5(3a)d2＝((x+x2 )2 + (y +y2 )2)0.5(3b)d3＝(x2+ (y + y3)2)0.5(3c)

The distance between the factory1 and the factory 2 which locates at the market M4 is given by d4:4d4＝(x2 + (y–y4)2)0.5(3d)

If the profit of the factory 1, Y1, is given by equation (4),Y1 =(1-t)[ mq((mp- tg d4) - (p3+ te d3）)- (p1+tm d1) m1- (p2+tm d2 ) m２– F1](4)

Making use of the law of equi-marginal productivity, that is, the ratio between the productivitiesof the two intermediate goods should be equal to the ratio between the delivered prices of them,quantities of these goods are derived as equations (5a) and (5b): (For simplicity, α and β are assumed
α=β=0.4):
m1 ＝A-1.25 mq1.25( (p2+tmd2) /( p1+tmd1))0.5(5a)m2 ＝A-1.25 mq 1.25( (p1+tmd1) /( p2+tmd2))0.5(5b)Since quantity of oil m3 is a linear function of amount of the final goods, it is simply given by (5c),m3 ＝ mq(5c)

From the above equations, the cost C(qm) of the factory 1 is obtained as equation (6),C(mq)=2A-1.25mq1.25 (p1+ tm d1)0.5(p2+tm d2 ) 0.5 + mq(p3+ ted3)+ F1(6)

Finally, the profit function of the factory 1 is shown as equation (7):Y1=(1-t)[ mq ((mp-tgd4)- (p3+ ted3) ) -2mq1.25 A-1.25(p1+tm d1)0.5(p2+tm d2 ) 0.5 – F1](7)

The factory 1 determines the transfer price and its location to maximize the firm’s total profits byusing equation (7).
Let us derive the profit of the factory 2, Y2. The profits are obtained under the following
assumptions: Since the factory 2 uses one unite of intermediate goods to produce one final goods,
the quantity of the final goods Q is equal to the intermediate goods mq. The market price of thefinished goods is shown by p which is determined by the market demand function (8).

p= a - vQ(8)5

where v is parameter, it is assumed as 1. The profit of the factory 2, Y2, is shown by equation (9).
Y2 = (1- t*)[(p – mp )Q - C(Q)-F2](9)where F2 is the fixed cost, and C(Q) is the costs of assembling the intermediate goods to the finishedgoods, C(Q) is given by equation (10). Parameter a is assumed 600 for simplicity of calculation.
C(Q) = b Q(g + Q)2/h(10)

where parameter b, g and h are assumed 1.5, 2, and 200 for simplicity of calculation, respectively.
Since the factory 2 determines the quantity supplied at the market to maximize its own profits, thequantity is derived by using equation (8), (9), and (10), it is shown by equation (11),Q=0.22( - 206 + (582409 - 900mp4 )0.5 )(11)Since the supply quantity Q is a function of the transfer price mp, the total profits of the firm Y canbe rewritten as a function of the transfer price as equation (12),Y= (1- t)[(0.22( -206 + (582409 - 900mp)0.5))(mp - tgd4 ) - (p3+ ted3) ) –-2(0.22(- 206 + (582409-900mp)0.5))1.25 A-1.25(p1+tm d1)0.5(p2+tm d2 ) 0.5 ―F1]＋(1-t*) [(600-(0.22(-206+(582409-900mp)0.5))-mp)(0.22(-206+(582409-900mp)0.5)) - F2].

(12)

2-2 Derivation of the optimal transfer price and a location prospective area
Let us derive the optimal transfer price mp4 and the location (X, Y) of the factory1 from equation(12). To derive the optimal transfer price and the location of the factory 1, the Gradient dynamics isused. The essence of this method is that first, an initial value set is given to xn, yn, and mpn in thefollowing equations (13a,b, and c) as a temporal solution, and obtain the values of xn+1, yn+1, andmpn+1 by calculations indicated by the three equations (13a, b, and c). And then, the same calculation
is iterated until a given tentative solution can be approximately judged as the solution. If the valuesof (xn+1, yn+1, mpn+1）in equations (13a, b, and c) become approximately the same as those of (xn, yn,
mpn ), the values can be admitted as the solution.
ｘn+1= xn +j*∂Y /∂x,

(13a)

6

ｙn+1= yn +j*∂Y /∂y,(13b)

mpn+1= mpn +j*∂Y /∂mp,(13c)

where j is the width of a step and n shows the number of the calculation. And ∂Y/∂x, ∂Y/∂y, and∂Y/∂mp4 are given by equations (14a, b, and c). In addition, the tax rates are assumed to be thesame in home and foreign country, t=t*=082. Other parameters’ value are assumed as follows:(x1=3, y1=-0.5), （x2= -30.5, y2=-0.5）, （x3=0, y3= -1.5）, （x4=0, y4=1）,A=1, p1=0.25, p2=2,
p3=0.2, tm=0.11, te=0.01, tg=0.225,F1=5000, F2=2500.
∂Y/∂x=0.18[-tgx (299.4-0.5mp)/d4+(299.4-0.5mp) (- tg(x/ d4) – te(x/ d3))- A-1.25 (299.4-0.5mp)1.25

tm [ {(ｐ2+tm d2)0.5/(ｐ1+tmd1 ) 0.5} (x – x1)/d1 ++{(ｐ1+tm d1)0.5/(ｐ2+tmd2 ) 0.5 }(x + x2)/d2]=0(14a)∂Y/∂y=0.18[-tg(y-1)(299.4-0.5mp)/d4+(299.4-0.5mp) (-tg((y –y4)/d4)-te((y-y3)/ d3) - A-1.25(299.4-0.5mp)1.25 tm [ {(ｐ2+tm d2)0.5/(ｐ1+tmd1 ) 0.5} (y +y1)/d1 ++{(ｐ1+tm d1)0.5/(ｐ2+tmd2 ) 0.5 }(y +y2)/d2]=0(14b)∂Y/∂mp=0.18[-(0.5*mp-299.4)] +0.22[299.4-2*0.5mp+0.5tg d4+ 0.5(p3 + ted3)++2.5A-1.25(ｐ2+tm d2)0.5(p1+tmd1) 0.5(299.4-0.5mp)0.25 ]=0.

(14c)

The calculation result derived from the Gradient dynamics (Puu, 1998, Ishikawa 2009) using
equation (14a, b, and c) shows the figure illustrated in Figure 2. Figure 2 indicates that the optimaltransfer price is approximately 442, and although the optimal location of the factory 1 is not clearlyspecified, the best location is can be found in the area where a chaotic phenomenon appears.
The graph shows that chaotic phenomenon appears along the area of M1, the source of raw
materials. It can be established that the optimal transfer price is at 442. However, it is difficult todetermine the optimal location of factory 1. Nevertheless, the optimal location is within the areaaround point M1 where chaotic phenomenon appears. If the factory 1 chooses to locate within thatparticular area, the profit will be almost at the same level. Firm’s total profits will be Y=33073.
3

The phenomenon shown in Figure 2 is a chaos or a chaotic phenomenon generated from the7

Figur2 Appearance of a chaotic phenomenon and a location prospective area

mp
442
0.2

441

y

440
0.4
439
2.6
0.6

2.8

x

3.0
3.2

2-3 Formation of location prospective area
As figure 2 shows, the optimal price can be fixed at 442. On the other hand, the optimal factory
locational site can’t be settled because of emergence of chaotic phenomenon. Indeed, firm can’t
specify the optimal locational site because of emergence of chaotic phenomenon. The firm can,however, set up a kind of location prospective area by referring the chaotic phenomenon: Because
chaotic phenomenon generates around the optimal site. Then, if the manufacturer locates its factory
within the range of the chaotic phenomenon, profit of firm is not far reduced from the optimal level.
It could be, thus, that the firm achieves so-called target level of profit. Hence, the area where thischaotic phenomenon appears is considered as a location prospective area (LPA, hereafter).
In addition, even when the optimal locational site is particularized, the firm may be unable to laya factory at the site because there are various reasons such as weak ground, high land values,
protracted bargaining, surrounding production circumstance or living environment in real life. In
these cases, firms need to explore the second-best locational spot around the area which has the
optimal site and they set up a locational prospective area. It could be said, therefore, that the firststep of the location determination process is to set up a Location Prospective Area, LPA4.
Cauchy Convergence in the derivation of optimal location and price. To identify this phenomenon
we need further analysis but this will not be discussed in this study. In the context of the analysis
this problem does make no obstacle to logical development.
4 An example of the application of the concept of the LPA is shown by Dumayas-Ishikawa (2013).
8

2-4 Firm’s profits and revenues of countries in different corporation tax rates
In the situation as shown in Figure 2, profit of the firm and revenues of the two countries are shownin the first row of Table 1. The second row of Table 2 shows the transfer price, size of LPA, firm’s
profit and country’s tax revenue when the corporation tax rates of the two countries are reduce to
0.27. If the tax rates are the same, reduction of tax rates does not change the transfer price. The
reduction widens of the size of LPA. This implies that the firm becomes to have wider options in thedetermination of factory’s location. The third row of Table 2 shows the results of calculation when
tax rates of the two countries are t=0.7, t*=0.82. It is interesting that the reduction of tax rate of thehome country increases the transfer price and increases the tax revenues of the foreign country.

Table 1 Variation of transfer price and firm’s profits due to change of tax rates
tax ratestransfer priceLPA

t=t*=0.82t=t*=0.27442

t=0.70,t*=0.82

442

417

small arealarge area

small areaaround M1round M1

around M1Price of final goods

551

551

545

sale amount

49

49

55

firm’s total profits

3307

13417

5869

Y1

2968

12040

5293

Y2

339

1377

576

tax revenue, home

13525

4453

12350

tax revenue, foreign

1544

509

2624

3 Locational power of the corporation tax and interest rate
3-1 Effect of the corporation tax rates on the factory’s location

Let us analyze the effect of the corporation tax rate on the factory’s location. This
analysis is conducted in the following assumptions: the freight rate of intermediate
goods, tg, is 0.725. The corporate tax rate of the foreign country is fixed at 0.82, while
the tax rate of the home country will be reduced in the order from 0.7 which means
relatively high tax rate, and 0.614 medium tax rate, and then 0.6 which implies
relatively low tax rate. The factory’s location will be derived for the three different tax
rate combinations (t=0.7, t*=0.82), (t=0.614, t*=0.82) and (t=0.6, t*=0.82). This
analysis will shows the locational power of the corporation tax rate.
3-1 Location of factory when the corporation tax rate is relatively highFigure 3A shows the LPA when the corporation tax rate of the home country is
9relatively high, that is, tax rates combination (t=0.7, t*=0.82). The LPA is formed near
point M1, and the transfer price is determined at 417.9. As the LPA is a liner which leads
to the market place, the firm locates the factory 1 on this line and it can obtain targeted
profit which can be estimated 5811.
Figure 3A LPA near the material M1 when the tax rate is relatively high

0.0

y
0.2

0.4

mp
0.6
417.90417.85417.80417.75417.70

2.0
2.5
3.0

x

Table 2 LPA, transfer price, and profits for the three combination of tax rates
tax rates

t=0.7,t*=0.82

t=0.614, t*=0.82

t=0.6,t=0.82

LPA

near M1

from M1 to M4near M4transfer price

418

408

profits

5811

7536

407
7526

7789

3-2 Change of position of LPA due to reduction of the corporation tax rate
When the tax rate of the home country decreases from 0.7 to 0.614 remaining that of the foreigncountry at 0.82, a large LPA is formed in the range from point M1 to the market M4. Figure 4B
depicts the large LPA. As shown in the second row of Table 2, if the firm locates the factory point
M1 and set the transfer price at 408, the firm obtains profit of 7536. While, the firm set the factory at
the place nest to the market place M4, the firm’s profit is 7526. Needless to say, the firm does not
locate the factory at the market place to avoid high tax rate.
10

Although the difference in firm’s profits is generated by locating the factory different places
which are included in the LPA, the difference between the profits is only 10 which is 0.15 percent
against the firm’s profit of 7526. This implies that if the firm locates factory within the LPA, firm
can drive almost same profits; the firm can obtain the wider option range in the determination offactory’s location.
Figure 3B Expansion of LPA due to reduction of the corporation tax rate

mp
408.5
408.0
1.0
407.5
407.0
0.5 y

406.5
0
0.0

1

x

2
0.5
3

3-3 Position of LPA when the corporation tax rate is relatively low
The LPA is formed near the market place M4 when the tax rate of the home country becomes
relatively low, 0.6, remaining that of the foreign country at 0.82. The transfer price of theintermediate goods is determined at 407. Figure 3C depicts the result of the calculation. Factory 1
and 2 may co-exist across border, and the firm’s total profits are 7789 as shown in the third row ofTable 2.

It can be said that the reduction of the corporation tax rate of the home country alters thefactory’s location pattern. Incorporating the results when the freight rate is 0.225 into consideration,
the locational power of the corporation tax rate is summarized as follows:
1) The reduction of the corporation tax rate expands LPA at the same position near point M1 when11the transportation cost of the intermediate goods is relatively low. The expansion of the LPA
gives the firm wider option in the determination of factory’s location:2) When the transportation cost of the intermediate goods is relatively high in a certain range, thereduction of the corporation tax rate moves the position of the LPA toward the market place M4,
consequently, the change of the corporation tax rate works to direct that the factory’s location isa place near market place M4.

Figure 3C LPA near the market place M4 when the tax rate is relatively low

mp407.351.0

407.300.5

407.25

y

0
0.0

1

x

2
0.5
3

4 Location power of the interest rate
4-1 Derivation of firm’s profit function as the interest rate is incorporated into consideration
In those days firm’s production activity was confined within a country, and the interest rate did not
directly influence factor’s location. In these days, however, the production activity is organizedacross borders, and the interest rate affects firm’s country selections and location site selections
within selected country; it works as location factor in the location determination process.
In this section the interest rate is incorporated into the analysis conducted in the previous section.
The interest rate of the home country and the foreign country are given by r and r*, respectively. In
12addition, the period of the firm’s production activity in question is indicated by T. If the firm obtains
the profits derived by equation (12) at every unit time, the firm’s total profits in the period of T, TY,
5

is given by equation (15) .

TY= ０

+

(15)

The equation (15) is rewritten as equation (16),TY= (-1/r+(1/r）Exp(rT)）(1- t)[(0.22( -206 + (582409 - 900mp)0.5))(mp4 - tgd4 ) - (p3+ ted3) ) –-2(0.22(- 206 + (582409-900mp)0.5))1.25 A-1.25(p1+tm d1)0.5(p2+tm d2 ) 0.5 ―F1]＋(-1/r*+(1/r*）Exp(r*T)）(1-t*) [(600-(0.22(-206+(582409-900mp)0.5))-mp)(0.22(-206+(582409-900mp)0.5)) - F2].

(16)

Based on the equation (16), locational power of the interest rate is examined in the next subsection.
4-2 Shift of factory’s location due to change of the interest rate
The optimal transfer price and factory’s location in this situation is derived by the same method usedin the previous section. And the transportation costs of intermediate goods, tg, is 0.625, thecorporation tax rates of the home and foreign country are fixed at 0.7 and 0.82, respectively. Others
are assumed as those used in pervious analysis. The period of the firm’s production activity inquestion is 1.55. Suppose that the interest rate of the foreign country is fixed at 0.1, and that of thehome country is initially 0.11 and later 0.35.
When the interest rate of the home country is 0.11, the optimal transfer price and LPA are
obtained by the applying the same method in the previous for equation (16). The calculation results
are shown in Figure 4A. The LPA is formed near point M1 and the transfer price is determined at417.6. Hence, when the interest rate of the home country is 0.11, the firm locates the factory at apoint which belongs to the LPA and set the transfer price 417.6 to achieve the targeted profit.
Let us derive the LPA and the transfer price when the interest rate of the home country is raised to
0.35. The optimal location site of factory and transfer price is derived in the same way. The
calculation result is depicted in Figure 4B. The LPA is formed near the market place M4 and the5

Incorporating another factors which are related to the interest rate such as construction costs offactory into consideration, the analysis will provide more comprehensive insights. Since theprimary aim of this section is to show that the interest rate has a location power, the analysis isconducted in the simplest framework.
13

transfer price is set at 410.4. In this case, the firm locates the factory at a point near the market place.

Figure 4A Formation location prospective area near point M1

0.0

y

0.5

mp
417.60417.59417.58

1.5

x

2.0
2.5
3.0

Comparison of Figure 4A and 4B indicates that when the interest rate of the home country ischanged from 0.11 to 0.35, the factory’s location shifts from point near M1 to point near M4. It canbe said that the interest rate works to move the location of the factory and change transfer price: theinterest rate clearly has a locational power.
It is noteworthy that since the interest rates are different between the two countries, the factory 1
does not locate at the market place to agglomerate with the factory2. They just co-exist across border
between the countries. Although this location pattern seems an agglomeration, they do not
agglomerate at the market place6.

6

The location pattern that manufacturing factories co-exist across border can be identified at theborder between Marisa and Singapore. Some Japanese manufacturing firms locates their factories
across border. The intermediate goods are moved between them by using the tariff price of which
concept is similar to the transfer price.
14

Figure 4B

Shift of locational prospective area due to change of interest rate

y

mp

0.5

1.0

0.0

0.5

410.384410.382410.380

0
1

x

2
3

4-3 Shift of factory’s location by expansion of period of production activity
Let us analyze the factory’s location when the period of the production activity expanded from 1.55
to 1.75. In this analysis, the interest rate of the home country is reassumed to 0.11 from 0.35.
The results of the analysis is shown in Figure 5. Comparing Figure 5 with Figure 4A, it is shownthat by the expansion of the period of the production activity the position of LPA is shifted from theplace near M1 to that near the market place M4, and the transfer price is slightly raised from 417.6 to418.4. That is, when the period of production activity in question is relatively short, the firm locatesthe factory at a place near point M1: While, when the period is long, the factory is located at a placenear the market M4. It can be said that the location of the factory is different according to the
production activity period.
The fact that the factory’s location is dependent on the period of production activity is very
important for the firm: The firm should deliberate the three major issues when it plans to establish
the factory, location site of the factory, transfer price of the intermediate goods, and the period of
production activity in question. Especially the judgment of the activity period is a troublesome issue
for the firm’s management. Because the construction costs of factory and the costs of the shifting
factory’s location, which are omitted in this analysis, are influenced by the interest rate, and thesecosts affect substantially the period of production activity.

15

Figure 5 Shift of locational production area by expansion of activity period

1.0

y

0.5

0.0

0.5

mp
418.35418.30418.250
1x

2
3

5 Concluding remarks
In the time which the economic activity has expanded on a global scale, the function which did not
attract attention so much begins to act with importance in firm’s management and some economic
factors also starts to influence firm’s location selections: For instances, the function of the transfer
price is used when firm moves intermediate goods between a firm’s factories; and the corporation
tax rate and the interest rates play an important role in firm’s country selections and the location
selections within the selected country.
The paper analyzed the locational effects of the corporation tax and the interest rate on thefactory’s location incorporating the function of the transfer price of intermediate goods into
consideration. The results of the analysis are summarized as follows: 1) The corporation tax and theinterest rate clearly influence factory’s location. 2) The reduction of the corporation tax rate of thehome country widens the LPA when the freight rate of intermediate goods is low. A large LPA gives
firm the wider options in the determination of factory’s location. 3) When the freight rate ofintermediate goods is raised to a certain level, reducing the tax rate of the home country moves the
position of the LPA from one of sources of material points to the site near the market place. Thismeans that the lowering the tax rate directly changes the factory’s location. 4) The increase of theinterest rate of the home country and the expansion of the period of production activity attract the16

position of the LPA toward the market place when the freight rate of intermediate goods is relatively
high.
It is safe to say from the results of the analysis that in highly globalized economy some economic
factors which were not paid attention so much before begin to play a significant role in the firm’s
location determination process.

References
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