Business Strategy And The Actual Tax Rate

A firm’s business-level strategy dictates how the firm competes in its chosen line of business. The best way for a firm to achieve a sustainable competitive advantage in its chosen market is to reinforce its business-level strategy with a host of activities, including functional policies, organization structure, etc. The choices made by each firm are likely to determine, to some extent, the level of tax avoidance because the firm strategies are, in part, based on firms’ willingness to deal with risk and uncertainty. We examine whether a firm’s business strategy influences its level of tax avoidance. We find that firm engaging in a strategy that focuses on minimizing and reducing the uncertainty of costs avoid fewer taxes than firms that not only follow a strategy focusing on product differentiation and the aggressive pursuit of opportunities, but are more willing to deal with uncertainty (prospectors). And we also find that property right, reputation and regulation also will impact the relation of business-level strategy and level of tax rate. Our results will help to further understand the impaction of different company’s competitive strategy on their micro behavior.