What types of firms relocate their headquarters and why?
Analyzing the effects of the dual corporate tax system∗

Kazuko Nakata∗∗
July 22, 2017
Abstract

In 2004, the Japanese government introduced the dual corporate tax system, which allows
prefectural governments to set their own corporate income tax rates. The purpose of thispaper is to examine the effects of this tax reform on firms’ location decisions based on adiscrete choice model, which investigates what types of firms relocate their headquarters
across prefectures and whether their relocation decision was affected by the tax reform.
The analysis indicates that the decision to relocate is negatively associated with firms’
age and positively associated with their amount of assets, number of employees, debt-toassets ratio, real estate rent, and payroll. Moreover, firms with a parent company, a foreignsubsidiary, fewer business establishments, less capital stock, and fewer employees at theheadquarters are more likely to relocate. Since the tax reform, firms tend to avoid
relocating to prefectures with a high corporate tax rate.

Keywords: Relocation, firms’ headquarters, corporate income tax, dual corporate tax
system, tax competition
JEL classification: D22, H25, H7, L2∗ This study is conducted as part of the Project “Theoretical and Empirical Analyses on Incidences ofCorporate Income Taxation” undertaken at the Research Institute of Economy, Trade and Industry (RIETI).
This study utilizes the micro data of questionnaire information from the “Basic Survey of Japanese Business
Structure and Activities,” which is conducted by the Ministry of Economy, Trade and Industry (METI), andthe “Financial Statements Statistics of Corporations by Industry,” which is provided by the Ministry of
Finance, Japan. The author is grateful for research assistance by Hiroaki Kurita and helpful comments andsuggestions by Discussion Paper Seminar participants at RIETI.
∗∗ Economics Department, Setsunan University, 17-8 Ikeda Nakamachi, Neyagawa-city, Osaka, Japan.
Tel:+81-72-800-1146, Fax:+81-72-839-8138. E-mail: nakata@econ.setsunan.ac.jp

11. Introduction
Attracting firms is important to stimulate regional economies. An increase in the numberof firms raises the number of employees and tax revenue, and new firms provide positive
externalities to existing firms through developing new technologies or offering
specialized information. Against this background, a large number of studies haveexamined firms’ location decisions to discover what factors attract firms to a particularlocation. One important determinant of firms’ decision where to locate their activities is
the tax burden they face, and it is important for governments to know whether corporate
income tax rates affect firms’ location choices and whether lowering corporate tax rates
helps to increase the number of firms. A widely used approach to measure the effects oftaxes is to compare the impact of tax reforms on firms’ location decisions. However, theimpact of tax reforms by regional governments is rarely examined.
In this context, a useful case study is provided by Japan. Japan employs a centralized
government system and prefectural and regional governments have limited authority overtaxes, including what is taxed, the tax rates, or the tax base. As a result, there are hardly
any differences in taxation across regions, and firms generally decide on the location of
their headquarters, business establishments, and factories without taking regional tax
differences into account. However, in 2004, the Japanese government implemented areform of prefectural corporate income taxes and introduced a dual tax system. Before
the tax reform, corporate income tax was imposed only on firms’ profits. However,following the tax reform, corporate income tax is imposed on firms’ profits as well as on
their capital and added value. Prefectural governments are allowed to set their own tax
rates for these two tax bases and have been given more authority over the taxes. The
introduction of the dual tax system has been controversial, since it makes the tax system
more complicated and runs counter to international trends.1 Despite this, the effects ofthe dual tax system have not yet been examined.
The purpose of this paper is to examine the effects of this dual tax system on firms’
location decisions. The analysis uses the “Basic Survey of Japanese Business Structure
and Activities” conducted by the Ministry of Economy, Trade and Industry (METI) andexamines the following three questions based on a discrete choice model: (1) What typesof firms relocate their headquarters across prefectures? (2) To what types of prefecture do
firms prefer to relocate their headquarters? And (3) were their relocation decisions
affected by the tax reform?
1 The state of Michigan in the United States has abolished the dual tax system on added value (Single
Business Tax) and Germany has abolished the business tax on capital.

2

This paper is related to the literature studying the effects of corporate income taxes onfirms’ location decisions.2 Some studies examine firms’ location or relocation decisions
across countries (Devereux and Griffith, 1998; Feld and Kirchgässner, 2003; Head andMayer, 2004; Basile, 2008; Chen and Moore, 2010; Dischinger and Riedel, 2011; Voget,
2011; Becker et al., 2012), while others investigate firms’ location decisions withincountries (Carlton, 1983; Bartik, 1985; Papke, 1991; Strauss-Kahn and Vives, 2009;
Becker et al., 2012; Brülhart et al., 2012). Strauss-Kahn and Vives (2009) examine firms’
decision to relocate their headquarters and find that firms avoid relocating their
headquarters to regions with high corporate income tax rates.
Employing Strauss-Kahn and Vives’s (2009) approach, this paper contributes to theexisting literature in the following two respects. First, this paper examines the effects ofthe dual tax system on firms’ relocation decision. No existing studies examine the effectsof tax policy changes or tax reforms that give regional governments more authority overtaxes on firms’ relocation decision. The analysis presented in this paper investigates
whether greater authority for prefectural governments over corporate income taxes giverise to tax competition among prefectural governments and whether providing regional
governments with such authority is desirable or not. Second, this paper uses data that
contain detail financial and cost information on firms and examines in detail thecharacteristics of firms that relocate their headquarters. In addition, this study
distinguishes firms that relocate their headquarters to large cities from firms that relocate
their headquarters to locations other than large cities and compares the objectives of eachtype of firms. The analysis thus provides an indication of what kinds of policies regional
governments in rural area should pursue to attract firms.
The analysis indicates that the decision to relocate is negatively associated with firms’
age and positively associated with their amount of assets, number of employees, debt-toassets ratio, real estate rent, and payroll. Moreover, firms with a parent company, a foreignsubsidiary, fewer business establishments, less capital stock, and fewer employees at theheadquarters are more likely to relocate. Firms relocate their headquarters to large cities
based on considerations of business efficiency and/or as a result of corporate restructuring
through mergers and corporate break-ups. On the other hand, firms relocate their
headquarters to locations other than large cities to reduce their payroll, their real estate
rent costs, or their debts. Firms tend to relocate headquarters to prefectures with larger
populations, higher per capita income, larger agglomeration effects, higher wages, ahigher population density, lower corporate income tax rates, lower land prices, and lower
unemployment rates. Since the tax reform, firms have avoided relocating to prefectures
2

For a survey of the literature, see Devereux and Griffith (2002) and Devereux (2006).

3

with high corporate tax rates.
The remainder of the paper is organized as follows. Section 2 presents Japan’s
corporate income tax system and the dual tax reform. Section 3 presents the data sources
and provides an outline of the data. Section 4 empirically examines firms’ relocation
decisions, while Section 5 concludes.
2. Japan’s corporate income tax system and the dual tax reform
This section explains Japan’s corporate income tax system and the dual tax reform. Japan
employs a centralized government system and governments consist of three levels: thecentral government, prefectural governments, and regional governments. The central
government determines most of the tax system, including items to be taxed, tax rates, andthe tax base of prefectural and regional governments, and prefectural and regional
governments have limited authority to determine their own tax system. That is, they haveto set their own tax rates between the ranges that the central government determines andneed to apply the definition of the tax base that the central government suggests.
Firms pay corporate income taxes to the three levels government; specifically, they pay
corporate income tax to the central government, enterprise tax on corporations andprefectural corporate inhabitant tax to the prefectural government, and municipal
corporate inhabitant tax to the regional government. The prefectural and municipal
corporate inhabitant taxes both consist of two tax items: a per capita portion and an
income based portion. The tax amount of the per capita portion is determined by theamount of capital and the number of employees, while the tax amount of the income based
portion is determined by firms’ profits. The corporate income tax and enterprise tax
amounts also depend on firms’ profits. When firms make a loss, they still need to pay the
per capita portion of the prefectural and municipal corporate inhabitant taxes, but they are
exempt from the other corporate taxes. Data from the National Tax Agency show that
only 30-35% of firms paid corporate income taxes to the central government in the 2000s
and that most firms did not pay taxes that are based on profits.3
Against this background, the Japanese government in 2004 conducted a reform of theprefectural enterprise tax on corporations and introduced the dual tax system. This dual
tax system applies to firms with more than 100 million yen in capital and adds firms’
capital and added value as part of the tax base to calculate prefectural enterprise taxes.
Firms have to pay tax on both capital and added value even when they make a loss, and3

Apart from corporate income tax, firms also pay consumption tax and property tax, which, however, arenot considered in this study.

4the number of firms that pay enterprise taxes increased. This dual tax system allows
prefectural governments to set their own tax rates for these two tax bases and provided
them with greater authority over the taxes.
3. Data analysis
3.1 Data
This paper uses three data sources: (1) the “Basic Survey of Japanese Business Structure
and Activities” (“Basic Survey” hereafter) conducted by the Ministry of Economy, Tradeand Industry (METI); (2) the “Hojinjuminzei Hojinjigyozei Zeiritsu Ichiranhyo” (“HHZI”
hereafter), which is provided by the Local Tax Bureau of the Ministry of Internal Affairs
and Communications; and (3) the “Financial Statements Statistics of Corporations byIndustry” (“FSSC” hereafter) provided by the Ministry of Finance.
The Basic Survey is used to examine firms’ relocation decision. The survey started in1991 and has been conducted annually since 1995. It provides general information on
firms (such as their name, location, and date of establishment), their number of businessestablishments, their number of employees, their relationship with other companies (suchas their parent company, subsidiaries, and other related companies), financial data (assets,
debts, equity, capital stock, sales, costs), as well as information on outsourcing, researchand development, skill development, etc. The survey covers firms with 50 or more
employees and with paid-up capital or invested funds of over 30 million yen. If firms do
not satisfy these two criteria, they are not included in the survey. Therefore, researchers
can identify when firms entered the market based on the date of establishment, but they
do not know when firms exit the market.
The HHZI lists all corporate tax rates employed by prefectural and regional
governments and is used to compute effective corporate income tax rates acrossprefectures.
The FSSC is used in conjunction with the data from the Basic Survey to examine whatpercentages of firms pay corporate income taxes. The FSSC has been compiled since1948 and provides general information on firms (such as their name and location),
financial information (sales, assets, liabilities, profits and losses, dividend payments,
depreciation costs and expenses, etc.), and the number of board members and employees.
The FSSC is based on a sampling survey and only firms with a certain amount of capitalare always included. Therefore, the FSSC is not an exhaustive survey of all firms thatexist in the market.
5The analysis uses Basic Survey data from 1995 to 2013 to examine firms’ relocation
decision between 1996 and 2013. Two methodologies are employed to examine thefollowing two questions. First, a logit model is used to examine what types of firms arelikely to relocate their headquarters. Second, a conditional logit model is employed toinvestigate to what types of prefectures firms prefer to relocate their headquarters. Threedifferent time periods are examined to investigate the effects of the dual tax reform on
firms’ relocation decisions: the entire observation period (from 1996 to 2013), the period
before the tax reform (from 1996 to 2003), and the period after the tax reform (from 2004
to 2013). Moreover, since the tax reform applied only to firms with more than 100 million
yen of capital funds, the difference between these firms and firms that were not affectedby the tax reform is also investigated.
Whether a firm relocated or not is identified by checking whether the name of theprefecture where the headquarters are located changed from the previous year. As
mentioned, the Basic Survey only covers firms with 50 or more employees and with paidup capital or invested funds of over 30 million yen, so if firms do not satisfy these two
criteria, they are not included in the survey. Researchers cannot identify when firms
relocate their headquarters if these firms relocate the headquarters during the time when
they do not satisfy the two criteria and are not included in the survey. Therefore, such
firms are excluded from the analysis. In addition, mergers or the corporate break-ups offirms may result in a change in the location of firms’ headquarters,4 and the location
choices of newly established firms and firms that are involved in a merger or corporate
break-ups will be compared.
3.2 Basic data analysis
This section investigates the characteristics of firms that relocate their headquarters,
effective corporate income tax rates across prefectures, and the percentages of firms thatpay corporate income taxes using the three data resources.
Figure 1 shows the number of firms that relocated their headquarters between 1996 and2013. The total number of firm relocations is 2,503, and the years with the largest numberof relocations are 1997 and 1998. Likely reasons for this spike are the sharp decline inland prices at this time as well as financial reorganization due to Japan’s financial “BigBang” deregulation.

4

See Holloway and Wheeler (1991) and Strauss-Kahn and Vives (2009) for details.

6Figure 1: Number of firm relocations
450

400

400

360

350
300
250
200

178

170
136 143

136 129 128

150

0

0
2000

50

1999

100

122

106 101 108 105

94

87

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

1998

1997

1996

0

Table 1 presents the industry distribution of firms that relocated their headquarters. The
table indicates that firms that relocated their headquarters are concentrated in particularindustries. Specifically, industries with the largest number of relocations are
manufacturing as well as wholesale and retail trade.
Table 1: Number of firm relocations by industry
Number of
firms
0
0
4
30
1,530
1
142
9
574
7
20
31
38
35
6
0
0
76

Industry
Agriculture and forestry
Fisheries
Mining and quarrying of stone and gravel
Construction
Manufacturing
Electricity
Information and communications
Transport and postal activities
Wholesale and retail trade
Finance and insurance
Real estate agencies and goods rental and leasing
Scientific and development research institutes
Accommodations
Living-related and personal services
Miscellaneous education and learning support
Medical services
Compound services
Miscellaneous services

Share (%)
0.00
0.00
0.16
1.20
61.13
0.04
5.67
0.36
22.93
0.28
0.80
1.24
1.52
1.40
0.24
0.00
0.00
3.04

Next, Table 2 shows the percentage of firms that relocated to Tokyo (Japan’s capital) or
Osaka (Japan’s second-largest city) and the percentage of firms that relocated to otherprefectures. About 30-40 % of firms relocated to the two prefectures, reflecting the factthat these two prefectures are the major business centers of Japan.
7

Table 2: Percentage of firms that relocated to Tokyo/Osaka and to other prefectures
1996
1997
1998
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

Relocated to Tokyo/Osaka (%)
33.71
56.67
28.00
26.47
32.56
36.72
39.08
37.50
39.86
34.04
38.52
32.94
34.91
33.66
46.30
38.10

Relocated to other prefectures (%)
66.29
43.33
72.00
73.53
67.44
63.28
60.92
62.50
60.14
65.96
61.48
67.06
65.09
66.34
53.70
61.90

In Table 3, Japan’s 47 prefectures are grouped into 10 regions and the distribution of firmsthat relocated their headquarters is shown. About 6% of firms left the North Kanto region,
about 55% of firms moved from the South Kanto region, and about 21% of firms relocatedfrom the Kinki region, which means that these three regions accounted for about 80% of
firms that relocated their headquarters. The North Kanto region consists of Ibaraki,
Tochigi, Gunma, Yamanashi, Nagano prefectures, all of which are close to Tokyo
prefecture. The South Kanto region includes Tokyo (the capital), while the Kinki region
includes Osaka (Japan’s second-largest city). This pattern indicates that firms that
relocated their headquarters are concentrated in areas which are close to the capital orother major cities and that firms established in these areas were more likely to relocate
their headquarters.
Table 3: Number of firm relocations across 10 regions
RegionPrefectures

Hokkaido
TohokuNorth Kanto
South Kanto
Hokuriku
Toukai
Kinki
Chugoku
Shikoku

Hokkaido
Aomori, Iwate, Miyagi, Akita, Yamagata, Fukushima
Ibaraki, Tochigi, Gunma, Yamanashi, Nagano
Saitama, Chiba, Tokyo, Kanagawa
Niigata, Toyama, Ishikawa, Fukui
Gifu, Shizuoka, Aichi, Mie
Shiga, Kyoto, Osaka, Hyogo, Nara, Wakayama
Tottori, Shimane, Okayama, Hiroshima, Yamaguchi
Tokushima, Kagawa, Ehime, Kochi
Fukuoka, Saga, Nagasaki, Kumamoto, Oita, Miyazaki,
Kagoshima, Okinawa

Kyushu8

Number of
firms
14
64
146
1,377
48
144
531
63
30
86

Share (%)
0.56
2.56
5.83
55.01
1.92
5.75
21.21
2.52
1.20
3.44

Table 4: Number of entries and exits of firms across 47 prefectures

Hokkaido
Aomori
Iwate
Miyagi
Akita
Yamagata
Fukushima
IbarakiTochigi
Gunma
Saitama
Chiba
Tokyo
Kanagawa
NiigataToyamaIshikawa
Fukui
Yamanashi
NaganoGifu
Shizuoka
Aichi
Mie
Shiga
Kyoto
Osaka
Hyogo
Nara
Wakayama
Tottori
Shimane
Okayama
Hiroshima
Yamaguchi
Tokushima
KagawaEhime
Kochi
Fukuoka
Saga
Nagasaki
Kumamoto
Oita
MiyazakiKagoshima
Okinawa

Number of entries

Number of exits

24
4
16
23
8
12
32
76
43
43
193
123
790
263
26
14
7
9
16
29
32
55
67
23
35
40
183
106
13
6
5
5
21
18
19
4
15
9
0
46
5
7
10
7
7
11
3

14
5
13
8
7
10
21
45
30
34
142
112
908
215
18
11
11
8
11
26
18
43
71
12
17
40
348
107
17
2
5
5
11
31
11
4
14
12
0
37
8
7
6
10
9
7
2

9

Number of entries Number of exits
10
-1
3
15
1
2
11
31
13
9
51
11
-118
48
8
3
-4
1
5
3
14
12
-4
11
18
0
-165
-1
-4
4
0
0
10
-13
8
0
1
-3
0
9
-3
0
4
-3
-2
4
1

-200
Hokkaido
Aomori
Iwate
Miyagi
Akita
Yamagata
Fukushima
IbarakiTochigi
Gumma
Saitama
Chiba
Tokyo
Kanagawa
NiigataToyamaIshikawa
Fukui
Yamanashi
NaganoGifu
Shizuoka
Aichi
Mie
Shiga
Kyoto
Osaka
Hyogo
Nara
Wakayama
Tottori
Shimane
Okayama
Hiroshima
Yamaguchi
Tokushima
KagawaEhime
Kochi
Fukuoka
Saga
Nagasaki
Kumamoto
Oita
MiyazakiKagoshima
Okinawa

Figure 2: Number of entries and exits of firms across 47 prefectures
1000

800

600

400

200

0

-400
Number of entries
Number of exits

10
Number of entries - Number of exits

Table 4 and Figure 2 show the number of firm entries from other prefectures and exits toother prefectures across all 47 prefectures and indicate that firm turnover is higher inplaces around Tokyo and Osaka. Some prefectures around Tokyo and Osaka have positive
net entries (=number of entries – number of exits), while Tokyo and Osaka have negative
net entries, meaning that the number of firm exits is larger than the number of firm entries.
This result implies that firms prefer to locate close to large cities around Tokyo and Osaka,
but land prices in the two prefectures are much higher than land prices in other prefecturesand high land prices force firms to leave Tokyo and Osaka.
Next, effective corporate income tax rates across prefectures are computed. The
effective corporate income tax rate is defined as follows:
Effective corporate income tax rate＝

CIT × 1＋LIT ＋ ETC
1＋ETC

CIT: corporate income tax
ETC: enterprise tax on corporations
LIT: prefectural corporate inhabitant tax + municipal corporate inhabitant tax
Corporate income tax and enterprise tax on corporations depend on firms’ profits. There
are two corporate income tax rates: a lower tax rate that is applied to firms with profits ofless than eight million yen and a higher tax rate that is applied to firms with profits ofmore than eight million yen. Meanwhile, there are three enterprise tax rates: the lowest
tax rate is applied to firms with profits of less than four million yen, an intermediate tax
rate is applied to firms with profits between four and eight million yen, and the highest
tax rate is applied to firms with profits of more than eight million yen. In addition, thedual tax system is applied to firms with more than 100 million yen in capital funds, andthere are six effective tax rates in total for each prefecture. The six effective tax rates areshown in Table 5.
Table 5: The six effective tax rates
Name of tax

Characteristics of firms to which the tax rate is applied

Low-tax

Firms with profits of less than four million yen and less than 100 million yen
in capital funds
Firms with profits between four and eight million yen and less than 100 million
yen in capital funds
Firms with profits of more than eight million yen and less than 100 million yen
in capital funds
Firms with profits of less than four million yen and more than 100 million yen
in capital funds
Firms with profits between four and eight million yen and more than 100
million yen in capital funds
Firms with profits of more than eight million yen and more than 100 million
yen in capital funds

Middle-tax
High-tax
Dual-low-tax
Dual-middle-tax
Dual-high-tax

11

Figure 3: Average of the six effective tax rates
0.53
0.48
0.43
0.38
0.33
0.28
0.23

Dual-low-tax

Dual-middle-tax

Dual-high-tax

Low-tax

Middle-tax

High-tax

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0.18

Figure 4: Standard deviation of the six effective tax rates
0.00280.00260.00240.00220.002
0.00180.00160.00140.0012Dual-low-tax

Dual-middle-tax

Dual-high-tax

Low-tax

Middle-tax

High-tax

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0.001

Figure 3 depicts the average of the six effective tax rates across prefectures between 1995
and 2013 and shows that effective tax rates declined in 1998, 1999, 2008, 2009, and 2012.
12

The decline in these years was due to the decrease in corporate income tax rates in 1998,
1999, 2009, and 2012 and the reform of the enterprise tax on corporations in 2008. Duallow-tax, dual-middle-tax and dual-high-tax declined in 2004 due to the introduction of
the dual tax system. Only a few prefectures have changed their tax rates since theintroduction of the dual tax system, and the decline of the tax rates is mostly attributable
to the decrease in corporate income tax rates. Figure 4 presents the standard deviation of
the six effective tax rates across prefectures between 1995 and 2013. The figure shows
the differences in effective tax rates across prefectures and indicates that the standard
deviation declined in the latter half of the 1990s and then remained more or lessunchanged until 2008. After 2008, the standard deviation of the dual-high-tax rate and thehigh-tax rate increased, while the standard deviation of the other tax rates decreased. The
reason for the pattern observed after 2008 is that the corporate income tax rate waslowered in 2009 and that the weights of both the enterprise tax on corporations and theprefectural corporate inhabitant tax in the definitions of the effective corporate income
tax increased, which resulted in more pronounced tax differences across prefectures. Thisimplies that it is important to take both the central and prefectural governments’ tax rates
into account when examining the effects of tax rates on firms’ location decisions. On thewhole, even after the introduction of the dual tax system, most prefectural governments
did not change their tax rates and there is not much difference in tax rates acrossprefectures.
Finally, the percentage of firms that pay corporate taxes is examined using both the
Basic Survey and the FSSC. As explained in Section 2, when firms make a loss, they are
exempt from paying corporate taxes that are based on profits. If most of the firms that
relocated their headquarters did not pay taxes, their relocation decision will not have been
affected by the tax reform. Unfortunately, the Basic Survey does not include tax data,
while the FSSC only provides data on the total amount of corporate taxes that firms pay
to all three levels of government together. Therefore, using firms’ names, the two datasetsare merged in order to estimate the percentage of firms that pay taxes. According to the“Chiho Zaisei Tokei Nenpo,” published by Ministry of Internal Affairs andCommunications, the per capita portion of prefectural and municipal corporate inhabitanttaxes amounts to approximately 1% of a firm’s profits. Therefore, if firms pay taxes thatare larger than 1% of their profits, they are considered to pay corporate income taxes. The
percentage is estimated using a logit model, where the dependent variable is a dummy
indicating whether a firm paid corporate income taxes or not, while explanatory variables
include variables on firms’ characteristics such as their investment, number of employees,
other taxes (such as documentary stamp tax, registration and license tax, property tax, real13

estate acquisition tax, depreciable property tax, car taxes, etc.) and public charges, profits,
a dummy indicating whether they have an overseas subsidiary, and year dummies.
Applying this logit model to the Basic Survey data suggests that about 90% of firms were
paying taxes. This value seems large compared to data from the National Tax Agency,
which indicates that only 30-35% of firms pay taxes. However, the Basic Survey includes
only large firms (in terms of both the amount of assets and the number of employees), sothat the result does not seem unreasonable. Thus, the logit estimation suggests that firms
were paying taxes and that will have been affected by the dual tax reform.
4. Empirical analysis: Firm’ relocation decision
4.1 Estimation Method
This section explains the methodology employed to examine firms’ relocation decisions.
To begin with, what types of firms decide to relocate their headquarters is investigatedusing the following logit model:
Prob

=1 =

+ "# $% +

&(
+ 4
( + 7
(8 + =(
'
536/
>//;/
)*+,-./0
93:2;*6<.3/1+,1123+,1123+,1123-

where the dependent variable is a dummy variable indicating whether firm ? relocatedits headquarters in year @ or not (= 1 means relocation,= 0 means no
relocation). Explanatory variables consist of vector # $% representing firms’
characteristics, industry dummies &' , year dummies 4 , and regional dummies 78 .
is a constant and " represents the parameters to be estimated. It is assumed that firms’
relocation decision is determined based on data of the previous year. Firms’ characteristics
included in # $% are the number of business establishments, the number of employees,
the number of employees at the headquarters, the amount of assets, firm age, the debt-toassets ratio, the advertising-to-sales ratio, the ratio of real estate rent to total costs, theratio of payroll expenses to total costs, capital stock, a dummy variable indicating whether
a firm has a parent company, a dummy variable indicating whether a firm has one or moredomestic subsidiaries, and a dummy variable indicating whether a firm has one or more
overseas subsidiaries. It is possible that a firm’s headquarters were relocated as a resultof a merger or corporate break-ups, so that a dummy variable indicating whether firms
were established through a merger or corporate break-ups is also included. The basic
statistics of explanatory variables are shown in Appendix Table A.1.
14

Next, to what types of prefectures firms prefer to relocate their headquarters isinvestigated using the following conditional logit model:

BC =DEF G C H + E C $% IKL
ȂCM% DEF GC H + E C $% I

where the dependent variable B C

is the probability that firm ? relocates its

headquarters to prefecture N in year @. Explanatory variables are the effective tax rate,
G C , as well as socio-economic variables for the prefecture E C $% , which include thepopulation, per capita income, the average wage, the average price of land, the numberof firms in the same industry (to gauge agglomeration effects), the price of electricity, theunemployment rate, the population share of young people (those aged under 15), thepopulation density, airport facilities (the number of flights, the number of passengers, theshare of international flights, the share of foreign passengers),5 government expenditure(per capita public investment, per capita expenditure on public education, per capita
public debt), and the distance between the new prefecture and the original prefecture. H
and I are parameters to be estimated. It is assumed that firms decide whether and where
to relocate based on socio-economic data for the previous year. On the other hand, withregard to the tax rate, it is assumed that what matters for firms’ relocation decision is the
expected effective tax rate in the new prefecture, so that the effective tax rate of the current
year is used in the estimation. It seems reasonable to assume that when the tax reform
was implemented in 2004, firms had ample information on the details of the reforms
before the implementation. In addition, several other tax reforms were implemented
between 1996 and 2013 and it is likely that firms took the impact of these reforms on the(expected) effective tax rate into account when making their relocation decision.
Consequently, three different observation periods are used to examine the effects of thedual tax reform on firms’ relocation decisions: the entire observation period (1996 to2013), the period before the tax reform (1996 to 2003), and the period after the tax reform(2004 to 2013). In addition, this tax reform only applied to firms with more than 100
million yen in capital funds, so that the difference between such firms and firms that were
unaffected by the tax reform is also investigated. The data sources and basic statistics of
explanatory variables are shown in Appendix Tables A.2 and A.3.

5

The reason for including this variable is that Strauss-Kahn and Vives (2009) find that airport facilities
are an important determinant of the relocation decision.

15

4.2 Estimation Results
4.2.1

Characteristics of firms that relocated their headquarters

Table 6 presents the results of the logit estimations examining the characteristics of firmsthat relocated their headquarters. Regression (1) includes industry dummies, regression(2) includes both industry and year dummies, and regression (3) includes industry, year,
and regional dummies. In addition, to investigate differences between firms that relocatedto Tokyo or Osaka and firms that relocated to other prefectures, regression (4) estimatesa logit model where the dependent variable is a dummy indicating whether a firm
relocated to Tokyo or Osaka, while regression (5) estimates a logit model where thedependent variable is a dummy indicating whether a firm relocated to prefectures otherthan Tokyo and Osaka. The results for the year dummies are not shown to conserve
space.6
Regression (1) shows that the coefficient on the number of business establishments isnegative and significant, indicating that firms that have many business establishments areunlikely to relocate their headquarters. The coefficient on the number of employees ispositive and significant, while the coefficient on the number of employees at theheadquarters is negative and significant. These results suggest that firms with many
employees – i.e., larger firms – are more likely to relocate headquarters, although firms
with many employees at the headquarters are less likely to relocate, probably because of
the high cost of transferring a large number of staff. The coefficient on assets is positiveand significant, indicating that firms with a large amount of assets are more likely to
relocate their headquarters, presumably because they are more likely to be able to afford
the costs involved. The coefficient on firm age is negative and significant, implying thatyounger firms are more likely to relocate their headquarters. One explanation is thatyoung firms are more likely to grow and have not yet establish strong networks in their
original location. The coefficients on the debt-to-assets ratio, the ratio of real estate rent
to total costs, and the ratio of payroll expenses to total costs are all positive and significant,indicating that firms with larger debt, larger real estate rents, and higher payroll costs are
more likely to relocate. These results imply that such firms tend to relocate in order tobring down costs by reducing real estate rents and payroll cost and/or to improve theirfinancial situation. The coefficient on the advertising-to-sales ratio is insignificant,indicating that the advertising-to-sales ratio has little effect on firms’ relocation decision.
6

A random parameter logit model is also estimated taking the length of the estimation period – i.e., the17 years from 1996 to 2013 – into account, and the results are almost the same as in regression (1).

16The coefficient on capital stock is negative and significant, implying that firms with alarge amount of capital stock have a lower probability of relocating. The coefficient on
the dummy indicating whether a firm has a parent company is positive and significant,suggesting that firms with a parent company are more likely to relocate. The coefficienton the dummy indicating whether a firm has domestic subsidiaries is insignificant, while
the coefficient on the dummy indicating whether a firm has foreign subsidiaries is positiveand significant, implying that firms with foreign subsidiaries are more likely to relocate
their headquarters. The coefficient on the dummy indicating whether a firm wasestablished through a merger or a corporate break-up is insignificant, indicating thatwhether firms were involved in a merger or corporate break-up does not have much effecton firms’ relocation decision. Among industry dummies, only the coefficients for
manufacturing and the information and communication industry are positive andsignificant, while the coefficient for the accommodations industry is negative andsignificant. Firms in manufacturing and the information and communication industry are
more likely to relocate, while firms in the accommodations industry are less likely tomove their headquarters, which is consistent with the results in Table 1.
The results of regressions (2) and (3) do not differ much from those of regression (1).
In regression (2), the coefficient on the ratio of payroll expenses to total costs becomesinsignificant, indicating that payroll costs do not have much effect on the relocation
decision. This result might be due to the fact that wages in Japan have been declining
since 1997 and year dummies absorb the effects of payroll costs. The coefficient on thewholesale and retail industry dummy becomes negative and significant, suggesting thatfirms in this industry are less likely to move. In regression (3), the coefficients on the ratioof payroll expenses to total costs and the capital stock become insignificant. The
coefficient on the Hokkaido dummy is negative and significant, indicating that firms inthis area are less likely to move their headquarters. On the other hand, the coefficients on
the South Kanto, North Kanto, and Kinki area dummies are positive and significant,suggesting that firms in these areas are more likely to relocate their headquarters, whichis consistent with the results in Table 3.
Comparing the results of regression (4) with those of regression (5) shows thedifference between firms that relocated their headquarters to Tokyo or Osaka and firmsthat relocated their headquarters to other prefectures. There are four main differences.
First, the coefficient on the debt-to-assets ratio is negative and significant in both
regressions, but it is only significant at the 10% level in regression (4), indicating that the
influence of a firm’s financial situation on its relocation decision is weak. Second, thecoefficient on the ratio of payroll expenses to total costs is insignificant in regression (4),17

while it is positive and significant in regression (5). This implies that the burden of payroll
expenses is smaller for firms that relocated their headquarters to Tokyo or Osaka thanfirms that relocated their headquarters to other prefectures. Third, while the coefficienton the dummy indicating whether a firm was established through a merger or corporate
break-up is significant in regression (4), it is insignificant in regression (5), suggestingthat mergers and corporate break-ups played a role in the relocation decision of firms that
relocated their headquarters to Tokyo or Osaka. Fourth, the results for the industry
dummies differ: the coefficient for the information and communication industry is
positive and significant, while the coefficient for the wholesale and retail trade industry
is negative and significant in regression (4). On the other hand, the coefficient for the
manufacturing sector is significant in regression (5), indicating that firms in the
manufacturing sector are likely to relocate to prefectures other than Tokyo and Osaka.
Taken together, these differences imply that firms that relocated their headquarters toTokyo or Osaka make their relocation decision based on considerations of businessefficiency provided by access to a large city and/or as a result of corporate restructuring
through mergers and corporate break-ups, while their financial situation does not play asubstantial role in their relocation decision. On the other hand, firms that relocated their
headquarters to other prefectures do so in order to reduce payroll and real estate rental
costs, and firms in the manufacturing sector are likely to relocate to prefectures other thanTokyo and Osaka.
To examine whether firms that relocated to other prefectures have different objectives
from firms that relocated to Tokyo or Osaka, Figures 5(a) to (c) compare the rate ofchange in the number of employees, in real estate rents, and in payrolls among threegroups of firms: (1) firms that did not move, (2) firms that relocated to Tokyo or Osaka,and (3) firms that relocated their headquarters to prefectures other than Tokyo or Osaka.
The figures indicate that firms that relocated to a prefecture other than Tokyo or Osakaregistered a substantial reduction in the number of employees, suggesting that these firms
were shrinking or used the opportunity of relocating their headquarters to reduce theirworkforce. In addition, such firms also experienced a reduction in real estate rents andpayrolls, suggesting that such firms relocated in order to reduce costs.

18

Figure 5(a): Number of employees

Relocate to Tokyo/Osaka
Did not relocate

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

1998

1997

0.02
0.01
0
-0.01
-0.02
-0.03
-0.04
-0.05
-0.06

1996

Rate of change

Relocated to other prefectures

Figure 5(b): Real estate rents
Rate of change
0.1
0.05
2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

1998

1997

-0.05

1996

0

-0.1
-0.15
Relocate to Tokyo/Osaka
Did not relocate

Relocated to other prefectures

Figure 5(c): Payrolls
Rate of change
0.06
0.03

-0.06
-0.09
-0.12
Relocate to Tokyo/Osaka
Did not relocate

Relocated to other prefectures

19

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

1998

1997

-0.03

1996

0

The findings so far can be summarized as follows. The decision to relocate is negatively
associated with firms’ age and positively associated with their amount of assets, numberof employees, debt-to-assets ratio, real estate rent, and payroll. Moreover, firms with aparent company, a foreign subsidiary, fewer business establishments, less capital stock,and fewer employees at the headquarters are more likely to relocate. Firms that relocate
their headquarters to Tokyo or Osaka do so for different reasons than firms that relocate
their headquarters to other prefectures. The former choose Tokyo or Osaka based on
considerations of business efficiency provided by access to a large city and/or as a resultof corporate restructuring through mergers and break-ups. On the other hand, the latter
relocate their headquarters to reduce payroll and real estate rent costs and firms in the
manufacturing sectors are likely to relocate to prefectures other than Tokyo and Osaka.
4.2.2

Characteristics of prefectures to which firms relocated their headquarters

This sections show the results of the conditional logit estimation examining to what typesof prefectures firms preferred to relocate their headquarters. Three different time periods
are examined to investigate the effects of the dual tax reform on firms’ relocation decision.
The results are presented in Table 7, consisting of five regressions. Regression (6) uses
data for the entire observation period (from 1996 to 2013), regressions (7) and (9) use
data for the period before the tax reform (from 1996 to 2003), and regressions (8) and(10) use data for the period after the tax reform (from 2004 to 2013).
Regression (6) shows that the coefficient on the effective corporate income tax rate is
negative and significant, indicating that firms avoid relocating their headquarters toprefectures with a high corporate income tax rate. The coefficients on the population andper capita income variables are positive and significant, implying that firms prefer torelocate their headquarters to prefectures with a large population and a high per capita
income. The coefficient on wages is positive and significant, meaning that firms prefer tochoose prefectures with higher wages. This result may seem counterintuitive, but giventhat higher wages typically imply that workers have higher skills, it likely reflects thatfirms prefer to relocate to prefectures where they can secure a skilled workforce. The
coefficient on land prices is negative and significant, suggesting that firms tend to avoid
relocating to prefectures with high land prices. The coefficient on the number of firms inthe same industry (agglomeration effects) is positive and significant, indicating that firms
choose prefectures where firms in the same industry are concentrated. The coefficient on
the price of electricity is insignificant, implying that the cost of electricity has little effecton the relocation decision. The coefficient on the unemployment rate is negative and20

significant, meaning that firms avoid relocating to prefectures with a high unemployment
rate. The coefficient on the population share of young people is insignificant, suggestingthat firms’ relocation decision is not linked to the population share of young people. The
coefficient on the population density is positive and significant, indicating that firms
prefer to relocate their headquarters to prefectures with a high population density. The
variables on the number of flights and passengers are excluded from the estimations
reported here, since preliminary estimates showed these to be insignificant. The
coefficient on the share of international flights is positive and significant, while thecoefficient on the share of foreign passengers is negative and significant. These results
imply that firms are likely to relocate to prefectures that have easy access to international
air travel and good airport facilities to Japanese businessmen. The coefficient on public
investment is positive and significant and the coefficient on public debt is negative andsignificant, while the coefficient on expenditure on public education is insignificant.
These results imply that firms prefer to choose prefectures with sufficient public
investment and lower public debt. The coefficient on the distance between the original
prefecture and a new prefecture is insignificant, meaning that the distance that firms needto move does not have much influence on the relocation decision.
Regressions (7) and (8) compare the effects of effective corporate income tax rates onfirms’ relocation decision before and after the tax reform. The coefficients on the effective
corporate income tax rate in regression (7) (before the dual tax reform) and (8) (after thedual tax reform) are both insignificant, implying that the effective corporate income tax
rate does not influence firms’ relocation decision. To confirm these results, regressions(9) and (10) exclude firms that were involved in a merger or corporate break-up. The
coefficient on the effective corporate income tax rate in regression (9) (before the dual
tax reform) is insignificant, although the coefficient on the effective corporate income tax
rate in regression (10) (after the dual tax reform) is negative and significant, indicatingthat after the tax reform, firms avoided relocating to prefectures with a high corporate
income tax rate. This result implies that a merger or corporate break-up have an impact
on firms’ choice of where to relocate their headquarters.
Table 8 compares the effects of effective corporate income tax rates on firms’ relocation
decision between firms to which the dual tax system applies and firms to which it does
not applied after the tax reform (from 2004 to 2013). The tax reform applies only to firms
with more than 100 million yen of capital funds, and regression (11) uses data for firms
to which the dual tax system applies, while regression (12) employs data for firms towhich the dual tax system does not applied. Further, regression (13) uses data for firms
to which the dual tax system applies and that were not involved in a merger or corporate
21

break-up, while regression (14) employs data for firms to which the dual tax system does
not applied and that were not involved in a merger and corporate break-up. The coefficienton the effective corporate income tax rate in regression (11) is insignificant, while inregression (12) it is positive and significant. In other words, firms to which the dual tax
system applies do not take the effective corporate income tax rate into account in theirrelocation decisions, while firms to which the dual tax system does not apply prefer torelocate their headquarters to prefectures with high corporate income tax rates, which iscounterintuitive. On the other hand, once firms that were established through a merger or
corporate break-up are excluded, the results change. The coefficient on the effective
corporate income tax rate in regression (13) is negative and significant, while inregression (14) it is insignificant. Firms to which the dual tax system applies avoid
prefectures with a high corporate income tax rate, while firms to which the dual tax
system does not applied do not take the effective tax rate into account in their relocation
decision. These results imply that the impact of mergers and corporate break-ups is muchlarger than the impact of the tax burden and that some firms choose a prefecture as a place
to relocate their headquarters even though the tax rate in the prefecture is high.
The results can be summarized as follows. Firms prefer to relocate their headquarters
to prefectures that have a large population, a high per capita income, high wages, large
agglomeration effects, a high population density, low land prices, and a low
unemployment rate. Easy access to airport facilities as well as government expenditurealso has some influence on firms’ relocation decision. Whether firms were involved in amerger or corporate break-up affects the place to which they relocate. Finally, following
the introduction of the dual tax system, firms avoided relocating to prefectures with a higheffective corporate income tax rate.

22

Table 6: Estimation results: What types of firms relocate their headquarters?
(1)
Number of business establishments
Number of employees
Number of employees at the headquarters
AssetsAge
Debt-to-assets ratio
Advertising-to-sales ratio
Ratio of real estate rent to total costs
Ratio of payroll expenses to total costs
Capital stock
Parent company (dummy)
Domestic subsidiaries (dummy)
Overseas subsidiaries (dummy)
Established by merger or break-up (dummy)
Construction sector (dummy)
Manufacturing sector (dummy)
Information and communications sector (dummy)
Wholesale and retail trade sector (dummy)
Real estate agencies and goods rental and leasing sector(dummy)Scientific and development research institutes sector(dummy)Accommodations sector (dummy)
Living-related and personal services sector (dummy)
Hokkaido (dummy)
Tohoku (dummy)
North Kanto (dummy)South Kanto (dummy)
Hokuriku (dummy)
Toukai (dummy)
Kinki (dummy)
Chugoku (dummy)
Shikoku (dummy)
Constant
Industry dummies
Year dummies
Regional dummies
Observations
Log pseudolikelihood
Pseudo R2

Coef.
-0.0890.305-0.4520.257-0.0110.758-1.2212.060
0.546-0.048
0.852
0.017
0.244
0.080
0.373
0.742
0.399
-0.152

***
***
***
***
***
***
***
**
**
***
***

***
**

-0.2500.264-0.483-0.397-7.904yesnono410,391-11719.73
0.058

*

***

(2)
Std. err.
0.033
0.043
0.021
0.036
0.002
0.128
1.468
0.610
0.250
0.020
0.058
0.058
0.073
0.067
0.250
0.137
0.168
0.145

Coef.
-0.0790.316-0.4650.260-0.0080.517-1.8292.646
0.343-0.0640.893-0.021
0.277
0.109
0.163
0.542
0.389
-0.3460.272-0.248

0.234

0.289

0.263
0.287

-0.549-0.3380.281-8.393yes
yes
no410,391-11332.63
0.089

**
***
***
***
***
***
***
***
***
***

***
**
**

**

***

Note: ***, ** and * denote significance at the 1%, 5% and 10% levels, respectively.

23(3)
Std. err.
0.033
0.045
0.021
0.037
0.002
0.130
1.584
0.589
0.257
0.020
0.058
0.059
0.074
0.067
0.250
0.136
0.168
0.145

Coef.
-0.1090.368-0.4220.116-0.0090.521-2.3922.112
0.012-0.0020.872-0.021
0.203
0.112
0.188
0.512
0.279
-0.3020.273-0.214

0.234

0.218

0.263
0.288

-0.621-0.305-0.717-0.0900.635
0.933-0.134
0.033
0.869
0.025
0.162
-8.475yesyes
yes
410,391-11192.49
0.100

0.294

***
***
***
***
***
***
***

***
***
*
***
*
**

**
**
***
***

***

***

(4)
Std. err.
0.033
0.045
0.022
0.040
0.002
0.132
1.601
0.644
0.262
0.022
0.058
0.059
0.074
0.068
0.250
0.137
0.169
0.145

Coef.
-0.011
0.242-0.4190.357-0.0080.305-2.3552.930-0.228-0.117
0.733
0.020
0.155
0.200
-0.0910.140
0.535-0.6170.272(5)Std. err.
0.046
0.064
0.032
0.050
0.002
0.181
2.494
0.820
0.393
0.027
0.083
0.085
0.108
0.097
0.332
0.186
0.220
0.200

Coef.
-0.1180.362-0.4830.180-0.0080.636-1.5062.406
0.687-0.0240.989-0.046
0.358
0.046
0.360
0.838
0.243
-0.127-0.1410.351-0.417

0.233

0.073

0.350

0.472

0.262
0.288
0.316
0.198
0.162
0.139
0.214
0.165
0.143
0.196
0.269
0.318

-0.514-0.911-0.532
0.011

*

*

0.361
0.484

0.320
0.327

***

0.423

-8.994yes
yes
no410,391-7394.15
0.091

***

0.357

-9.142yes
yes
no410,391-5184.15
0.079

***
***
***
***
*
***
***
***

**

**
***

***
***
***
***
***
***
***
**
***
***

***

Std. err.
0.039
0.052
0.023
0.045
0.002
0.155
1.863
0.709
0.307
0.026
0.069
0.073
0.085
0.081
0.326
0.183
0.230
0.194
0.422
0.301

Table 7: Estimation results: To what types of prefectures do firms relocate their headquarters?
(6)

Effective corporate income tax rate
Population
Per capita income
Wages
Land prices
Number of firms in the same
industry
Price of electricity
Unemployment rate
Population share of young people
Population density
Share of international flights
Share of foreign passengers
Per capita public investment
Per capita public debt
Per capita expenditure on public
education
Distance
Observations
Log pseudolikelihood
Pseudo R2

Coef.
-0.135
0.819
1.331
0.621
-0.283

(7)

***

0.069

(9)

0.472

***

0.115

0.716

0.441
0.038
3.512
0.050
0.724
0.669
0.104
0.117

1.904
-0.096
2.093
0.283
4.564
-4.5110.411-0.219

**

0.769
0.057
5.244
0.070
1.042
0.963
0.162
0.181

-0.733-0.052-6.4780.228
5.913-5.6150.149-0.593

0.396

0.533

-0.202

0.727

0.204

0.982

-0.639

0.789

0.344

1.090

-0.009117,641-7248.18
0.270

0.012

-0.01762,557-3853.66
0.268

0.017

0.001
55,084-3298.56
0.280

0.017

-0.022
51,982-3200.85
0.268

0.018

-0.012
44,791-2702.63
0.273

0.019

*
***
***
*

**
***
***
***
*
***

***
**
**

*
***
***
***
**

Note: ***, ** and * denote significance at the 1%, 5% and 10% levels, respectively.

24

***

***
***
***
***

Std. err.
0.135
0.197
0.515
0.486
0.086

Coef.
0.032
1.259
1.191
1.635
-0.641

0.096

(10)

***

0.046
-0.081-1.411
0.265
5.712-5.541
0.193-0.362

Coef.
-0.027
1.135
1.296
1.385
-0.625(8)
Coef.
-0.0120.509 **
1.429 ***
0.295
-0.227 ***Std. err.
0.098
0.174
0.510
0.580
0.098

0.541

***

Std. err.
0.075
0.118
0.321
0.354
0.048

***

Std. err.
0.102
0.193
0.564
0.638
0.106

Coef.
-0.215
0.648
1.060
0.122
-0.260

0.365

***

0.124

0.704

0.620
0.067
6.867
0.084
1.225
1.124
0.185
0.179

2.744
-0.124
6.019
0.319
4.801
-4.820
0.398
0.001

***

0.834
0.063
5.687
0.075
1.148
1.058
0.181
0.197

-0.916-0.091-10.9110.259
6.078-5.7440.369-0.721

***
**
**

**
***
***
***
**

***

Std. err.
0.131
0.221
0.592
0.539
0.096

***

0.109

*
***
*

***
***
***
*
***

0.684
0.073
7.219
0.092
1.337
1.231
0.207
0.197

Table 8: Estimation results: To what types of prefectures do firms relocate their headquarters?
(11)
Effective corporate income tax rate
Population
Per capita income
Wages
Land prices
Number of firms in the same industry
Price of electricity
Unemployment rate
Population share of young people
Population density
Share of international flights
Share of foreign passengers
Per capita public investment
Per capita public debt
Per capita expenditure on public education
Distance
Observations
Log pseudolikelihood
Pseudo R2

Coef.
-0.105
0.653
2.306
0.068
-0.4490.719-1.688-0.011-16.2170.254
4.728-4.8530.019-0.619-0.3800.082
34,921-1999.99
0.313

**
***
***
***
**
*
**
***
***
***
***

(12)
Std. err.
0.149
0.253
0.671
0.649
0.110
0.124
0.777
0.088
9.568
0.113
1.543
1.409
0.237
0.207
1.283
0.024

Coef.
0.662
0.299
0.139
0.604
0.075
0.732
0.568
-0.119
4.680
0.186
7.369
-6.4330.404-0.6130.720-0.102
20,163-1264.31
0.242

Notes: ***, ** and * denote significance at the 1%, 5% and 10% levels, respectively

25

**

***

***
***
*
***

(13)
Std. err.
0.298
0.313
0.799
0.750
0.139
0.158
1.001
0.101
9.676
0.129
2.010
1.854
0.293
0.335
1.537
0.022

Coef.
-0.2960.836
2.156-0.219-0.4850.736-1.703-0.057-19.791
0.257
5.988-6.0110.217-0.8190.409
0.065
27,542-1605.76
0.300

*
***
***
***
***
*
**
**
***
***
***
**

(14)
Std. err.
0.177
0.282
0.765
0.688
0.124
0.138
0.873
0.097
9.708
0.122
1.750
1.608
0.271
0.237
1.440
0.026

Coef.
0.275
0.408
-0.514
0.555
0.055
0.657
0.200
-0.155-1.4690.260
6.035-5.2000.626-0.631
0.071-0.106
17,249-1071.86
0.247

***

*
***
***
*
*
***

Std. err.
0.284
0.354
0.918
0.870
0.156
0.180
1.088
0.112
10.640
0.144
2.132
1.968
0.321
0.346
1.678
0.025

5. Conclusion
This paper examined the effects of the introduction of the dual tax system on firms’
relocation decisions. The analysis is based on the “Basic Survey of Japanese Business
Structure and Activities” and examined the following two questions based on a discrete
choice model: What types of firms relocate their headquarters across prefectures, and towhat types of prefecture do firms prefer to relocate their headquarters? The effects of thedual tax system were also investigated.
The results indicated that firms that are young, have a large number of employees, alarge amount of assets, a high debt-to-assets ratio, pay large real estate rental costs andhave large payroll expenses, a smaller number of business establishments, fewer
employees at their headquarters, and less capital stock are more likely to relocate their
headquarters. Moreover, firms with a parent company, an overseas subsidiary, fewer
business establishments are more likely to relocate. Firms relocate their headquarters toTokyo or Osaka based on considerations of business efficiency and/or as a result ofcorporate restructuring through mergers and corporate break-ups. On the other hand,firms relocate their headquarters to other prefectures to reduce payroll and real estate
rental costs. Firms prefer to relocate their headquarters to prefectures that have a large
population, a high per capita income, high average wages, large agglomeration effects, ahigh population density, low land prices, a low unemployment rate, good airport facilities,
and a large amount of government expenditure. Whether firms were involved in a merger
or corporate break-up also affected the probability of whether their headquarters wererelocated as well as the place of relocation. After the introduction of the dual tax system,
firms avoided relocating to prefectures with a high effective corporate income tax rate.
The analysis provides two polices implications. First, following the introduction of thedual tax system, firms’ response to effective corporate income tax rates was moresensitive than before and firms avoided relocating to prefectures with a high effective tax
rate even though prefectural governments rarely changed their tax rates. This result
implies that once prefectural governments obtain more taxation autonomy, tax
competition will occur. If the Japanese government proceeds with decentralization, it
should avoid providing tax autonomy of the tax items that encourage tax competition
among prefectural governments. Second, some firms that relocate their headquarters toprefectures other than Tokyo and Osaka aim to reduce real estate rental and payroll costs.
To attract firms, prefectural governments need to provide firms with a businessenvironment that allows them to keep their costs low and easy access to skilled workers.
They also need to ensure the soundness of public finances.

26

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28

Appendix
Table A.1 Description of variables
Observations

Mean

Standard
deviation

Minimum

Maximum

410,391

1.658

1.203

0.000

8.402

Number of employees (log)

410,391

5.267

1.030

3.912

11.941

Number of employees at the headquarters (log)

410,391

4.217

1.148

0.000

10.804

Assets （log）

410,391

8.440

1.379

1.792

16.533Age（log）

410,391

41.85

18.74

0.000

297.00Debt-to-assets ratio

410,391

0.667

0.224

0.000

1.000

Advertising-to-sales ratio

410,391

0.007

0.019

0.000

0.794

Ratio of real estate rent to total costs

410,391

0.021

0.031

0.000

0.958

Ratio of payroll expenses to total costs

410,391

0.180

0.128

0.000

1.000

Capital stock (log)

410,391

6.823

1.831

0.000

16.309Parent company (dummy)

410,391

0.344

0.475

0.000

1.000

Domestic subsidiaries (dummy)

410,391

0.428

0.495

0.000

1.000

Overseas subsidiaries (dummy)

410,391

0.171

0.377

0.000

1.000

Established by a merger or break-up (dummy)

410,391

0.128

0.334

0.000

1.000

Variable
Number of business establishments (log)Table A.2 Data source of variables
Variable

Data source

Effective corporate income tax rate

Local Tax Bureau of the Ministry of Internal Affairs andCommunications, “Hojinjuminzei Hojinjigyozei Zeiritsu Ichiranhyo”

Population

Cabinet Office, Government of Japan, “Kenmin Keizai Keisan Nenpo”

Per capita income

Cabinet Office, Government of Japan, “Kenmin Keizai Keisan Nenpo”

Wages

The Japan Institute for Labor Policy and Training

Land prices

Nikkei Needs

Number of firms in the same industry

Statistics Japan, “Keizai Census”

Price of electricity

Statistics Japan, “Kouri Bukka Tokeit Chosa”

Unemployment rate

Nikkei Needs

Population share of young people

Statistics Japan, “Jinko Suikei”

Population density

Nikkei Needs

Share of international flights
Share of foreign passengers
Per capita public investment
Per capita public debt
Per capita expenditure on public education
Distance

Obtained from the Civil Aviation Bureau of the Ministry of Land,
Infrastructure, Transport and Tourism
Obtained from the Civil Aviation Bureau of the Ministry of Land,
Infrastructure, Transport and Tourism
Ministry of Internal Affairs and Communications, “Chiho Zaisei Tokei
Nenpo”
Ministry of Internal Affairs and Communications, “Chiho Zaisei Tokei
Nenpo”
Ministry of Internal Affairs and Communications, “Chiho Zaisei Tokei
Nenpo”
Obtained from the website of the Geospatial Information Authority of
Japan

29

Table A.3 Description of variables
Variable

Observations

Mean

Standard
deviation

Minimum

Maximum

Effective corporate income tax rate

117,641

0.308

0.195

0.000

0.514

Population

117,641

14.4980.738

13.27416.398Per capita income

117,641

7.921

0.142

7.575

8.558

Wages

117,641

8.411

0.152

7.725

9.158

Land prices

117,641

7.248

1.024

5.086

10.551

Number of firms in the same industry

117,641

8.120

1.227

0.693

11.405

Price of electricity

117,641

9.076

0.088

8.897

9.278

Unemployment rate

117,641

3.997

1.129

1.700

10.262

Population share of young people

117,641

0.147

0.016

0.111

0.221

Population density

117,641

5.847

0.961

4.181

8.746

Share of international flights

117,641

0.050

0.143

0.000

0.958

Share of foreign passengers

117,641

0.066

0.165

0.000

1.000

Per capita public investment

117,641

4.682

0.624

2.653

5.882

Per capita public debt

117,641

3.938

0.449

2.627

5.062

Per capita expenditure on public education

117,641

4.612

0.163

4.190

5.039

Distance

117,641

5.707

1.207

0.000

7.716

30