Playing Easy or Playing Hard to Get: When and How to Attract FDI

Thomas Gresik, Dirk Schindler and Guttorm Schjelderup

No 8415, CESifo Working Paper Series from CESifo

Abstract: We study the link between a country’s institutional quality in tax collection and its optimal corporate tax policies in a model of heterogeneous multinationals that can shift income using both debt and transfer prices. Countries with weak institutional quality can be made worse off adopting policies that attract FDI as the benefits from higher wages and production are more than offset by tax base erosion. Countries with moderate institutional quality can gain from under-utilizing their ability to collect taxes, since the benefit of attracting more FDI outstrips the benefit of increased tax revenue. Countries with very strong institutions benefit from FDI and should utilize their full ability to collect taxes.

Keywords: FDI; thin capitalization rules; transfer pricing; institutional quality (search for similar items in EconPapers)
JEL-codes: F23 F68 H26 H32 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-int and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Playing Easy or Playing Hard to Get: When and How to Attract FDI (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8415

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