Empirical Analysis of Corporate Tax and Foreign Direct Investment

Tomonori Sato
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Tomonori Sato: Former Economist, Policy Research Institute, Ministry of Finance

Public Policy Review, 2012, vol. 8, issue 1, 1-20

Abstract: This paper provides the insight into the effect of corporate income tax on foreign direct investment. The enhanced liquidity of labor and capital through globalization has accelerated the efficient and global utilization of human resources and capital. Considering this situation, many countries are acutely aware of the importance of attracting foreign direct investment in order to vitalize and promote economic growth. Many countries, therefore, have been providing and developing attractive environments for investments, and have lowered their corporate tax rates one after another. However, there are many elements which affect foreign direct investment and the effect of corporate tax on foreign direct investment is not necessarily apparent. We therefore empirically analyze foreign direct investment based on a panel of bilateral foreign direct investment flows among OECD 30 countries over 1985 – 2007. In this paper, we further address the dynamic panel data analysis (System GMM) through the expansion of the static panel data analysis in the previous research. This is why we recognize that the current scale of foreign direct investment may be influenced by the investment level of the previous year. We confirmed the expected result in the empirical analyses, namely, that the current scale of foreign direct investment is influenced by the investment level of the previous period. These studies also implied that the impact of corporate tax on foreign investment is significantly negative.

Date: 2012
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