Productivity and Taxes as Drivers of FDI

Assaf Razin and Efraim Sadka

No 13094, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a framework in which the host country productivity has a positive effect on the intensive margin (the size of FDI flows), but only an ambiguous effect on the extensive margin (the likelihood of FDI flows to occur). The source-country productivity has a negative effect on the extensive margin. An increase in the host-country corporate tax rate reduces the actual FDI flows the likelihood of such flows to occur. An increase in the source-country corporate tax rate reduces the likelihood of FDI flows. These predictions are confronted with Data on FDI flows, drawn from the International Direct Investment dataset (Source OECD), covering the bilateral FDI flows among 18 OECD countries over the period 1987 to 2003. We find some support for the main predictions of the model.

JEL-codes: F2 F21 F23 F3 (search for similar items in EconPapers)
Date: 2007-05
New Economics Papers: this item is included in nep-int and nep-pbe
Note: IFM ITI
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Citations: View citations in EconPapers (14)

Published as Productivity and Taxes as Drivers of Foreign Direct Investment [with Comments and Discussion] Assaf Razin, Efraim Sadka, Mihir A. Desai and Deborah Swenson "Brookings Trade Forum, Foreign Direct Investment" (2007), pp. 105-148 Published by: Brookings Institution Press

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Working Paper: Productivity and Taxes as Drivers of FDI (2007)
Working Paper: Productivity and Taxes as Drivers of FDI (2007)
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