No. 142: Business model digitalization, competition, and tax savings

We examine the effect of business model digitalization on competition and how corporate tax savings through digitalization may augment this relationship. Global policymakers express concern that digitalization-related tax savings unfairly benefit the competitive standing of rival firms over their competitors. Using textual analysis techniques to identify firms’ business models, we show that rivals’ adoption of a digital business model leads to negative economic effects on the performance of their non-digitalizing competitors. We estimate that a one standard deviation increase in the share of digitalized rivals in a market reduces a competitor’s market share by 4.6%. Suggesting significant tax savings from digitalizing, we also find that digitalizing rivals substantially reduce their effective tax rates, mostly by increased use of tax havens. However, when we test whether the detected competitive externalities vary depending on the share of digitalizing rivals with versus without substantial digitalization-related tax savings, we find the economic magnitudes of their effects are quantitatively similar. Therefore, contrary to policymakers’ concerns of digitalization-related tax savings unfairly shaping competition, our findings suggest that tax savings from digitalization is not a key driver of altering competition between digitalized and non-digitalized firms.