Taxes, Institutions and Foreign Diversification Opportunities

Mihir A. Desai () and Dhammika Dharmapala
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Mihir A. Desai: Harvard University and NBER

No 828, Working Papers from Oxford University Centre for Business Taxation

Abstract: Investors can access foreign diversification opportunities through either foreign portfolio investment (FPI) or foreign direct investment (FDI). The worldwide tax regime employed by the U.S. potentially distorts this choice by penalizing FDI, relative to FPI, in low-tax countries. On the other hand, weak investor protections in foreign countries may increase the value of control, creating an incentive to use FDI rather than FPI. By combining data on US outbound FPI and FDI, this paper analyzes whether the composition of US outbound capital flows reflects these incentives to bypass home and host country institutional regimes. The results suggest that the residual tax on US multinational firms’ foreign earnings skews the composition of outbound capital flows - a 10% decrease in a foreign country’s corporate tax rate increases US investors’ equity FPI holdings by approximately 10%, controlling for effects on FDI. Investor protections also seem to shape portfolio choices, though these results are not robust when only withincountry variation is employed.

Keywords: Foreign Portfolio Investment; Foreign Direct Investment; Taxes; Investor Protections (search for similar items in EconPapers)
JEL-codes: F21 F23 G30 H25 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Taxes, institutions and foreign diversification opportunities (2009)
Working Paper: Taxes, Institutions and Foreign Diversification Opportunities (2007)
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