Tax differentials and inflow of foreign direct investments: evidence from foreign operations of U.S. multinational companies

Watanabe Yuichi

No 263, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: This paper concerns the measurement of the impact of tax differentials across countries on inflow of Foreign Direct Investment (FDI) by using comprehensive data on the foreign operations of U.S. multinational corporations that has been collected by the Bureau of Economic Analysis (BEA), the U.S. Department of Commerce. In particular, this research focuses on examining: (1) how responsive FDI locations are to tax differentials across countries, (2) how different the tax effect on FDI inflow is between developed and developing countries, and (3) whether investment location decisions have become more or less sensitive to tax differences between countries over time ranging from the late 1990s to the early 2000s. Estimation results suggest that high rates of corporate income taxation are associated with reduced foreign assets of U.S. multinational firms in all industries by decreasing the return to foreign asset investment. Further, foreign assets of U.S. multinationals in all industries have become more responsive to non-income tax differentials across countries than to income tax differences from 1999 to 2004. Empirical estimates also indicate that foreign investment by American firms is associated with higher tax sensitivity more in developed countries than in those that are developing.

Keywords: Developing countries; United States; Foreign investments; International business enterprises; Taxation; Tax differentials; FDI inflow; Developed/Developing countries; Income/Non-income taxation; Developed countries (search for similar items in EconPapers)
JEL-codes: F21 F23 H25 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-acc, nep-ifn and nep-pbe
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Published in IDE Discussion Paper = IDE Discussion Paper, No. 263. 2010-12

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