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How does FDI affect corporate tax revenue of the host country?

Thanh Tam Nguyen-Huu (), Manh Hung Nguyen () and Aditya Goenka ()

No 13-03, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: This paper investigates the effect of foreign direct investment (FDI) on the welfare of the host country through the process of corporate tax rate determination. Based on a theoretical model that allows for the entry of heterogenous multinational firms, we show that the impact of FDI on government revenue will depend on the competition effect and the technological spillovers. We argue that the competition effect reduces production of domestic firms and thereby lowers the level of corporate tax revenue while the technological spillovers can have positive or negative welfare effects depending on the absorptive capacity of local firms. The degree to which FDI contribute to government revenue in the host country depends also on the demand creation effect and technological transfer cost.

Keywords: FDI; corporate tax revenue (search for similar items in EconPapers)
JEL-codes: F15 F23 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2013
New Economics Papers: this item is included in nep-cse, nep-pbe, nep-pub, nep-sbm and nep-sea
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