Capital Controls, Liberalizations, and Foreign Direct Investement

Mihir A. Desai, C. Fritz Foley and James Hines

No 10337, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Affiliate-level evidence indicates that American multinational firms circumvent capital controls by adjusting their reported intrafirm trade, affiliate profitability, and dividend repatriations. As a result, the reported profit impact of local capital controls is comparable to the effect of 24 percent higher corporate tax rates, and affiliates located in countries imposing capital controls are 9.8 percent more likely than other affiliates to remit dividends to parent companies. Multinational affiliates located in countries with capital controls face 5.4 percent higher interest rates on local borrowing than do affiliates of the same parent borrowing locally in countries without capital controls. Together, the costliness of avoidance and higher interest rates raise the cost of capital, significantly reducing the level of foreign direct investment. American affiliates are 13-16 percent smaller in countries with capital controls than they are in comparable countries without capital controls. These effects are reversed when countries liberalize their capital account restrictions.

JEL-codes: F21 F23 (search for similar items in EconPapers)
Date: 2004-03
New Economics Papers: this item is included in nep-ifn
Note: CF IFM ITI
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Citations: View citations in EconPapers (17)

Published as Desai, Mihir A., C. Fritz Foley and James R. Hines, Jr. "Capital Controls, Liberalizations, And Foreign Direct Investment," Review of Financial Studies, 2006, v19(4,Winter), 1433-1464.

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Journal Article: Capital Controls, Liberalizations, and Foreign Direct Investment (2006)
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