Fancy a Stay at the 'Hotel California'? Foreign Direct Investment, Taxation and Firing Costs

Holger Görg

No 665, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper looks at the trade off between investment incentives and exit costs for the location of foreign direct investment (FDI). This issue does not appear to have been tackled in much detail in the literature. The analysis considers the effect of profit taxation (as a measure of investment incentives) and an index of hiring and firing costs (proxying exit costs) on the location of US outward FDI in 33 host countries. The results suggest that US FDI, in particular in manufacturing is negatively affected by the level of profit taxation and exit costs. Hence, if countries want to attract FDI it may not suffice that incentives are provided in order to ease the entry of multinationals. Instead, it also appears to be important that exit costs are at a level attractive to multinationals. In other words, multinationals may not check into an attractive looking Hotel California type host country if it is difficult to leave.

Keywords: investment incentives; taxation; firing costs; exit costs; foreign direct investment (search for similar items in EconPapers)
JEL-codes: F23 H25 J65 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2002-12
New Economics Papers: this item is included in nep-ifn
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Citations: View citations in EconPapers (6)

Published - revised version published as 'Fancy a stay at the 'Hotel California'? in: Kyklos, 2005, 58 (4), 519-535

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