Chains of Ownership, Regional Tax Competition, and Foreign Direct Investment

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

No 9224, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper considers the effect of taxation on the location of foreign direct investment (FDI) and taxable income reported by multinational firms with particular attention to the regional dynamics of tax competition and the role of chains of ownership. Confidential affiliate-level data are used to compare the investment and income-reporting behavior of American-owned foreign affiliates across ownership forms and regions. Ten percent higher tax rates are associated with 5.0 percent lower FDI, controlling for parent company and observable aspects of local economies, and 0.9 percent lower returns on assets, controlling for parent company and level of FDI. Tax effects are particularly strong within Europe, where ten percent higher tax rates are associated with 7.7 percent lower FDI and 1.7 percent lower returns on assets. Indirectly owned foreign affiliates also exhibit strong tax effects, ten percent higher tax rates being associated with 12.0 percent lower FDI and 1.4 percent lower returns on assets. American firms finance a growing fraction of their foreign operations indirectly through chains of ownership, which now account for more than 30 percent of aggregate foreign assets and sales. Ownership chains are particularly concentrated among European affiliates. Since multinational firms from countries other than the United States face tax environments similar to those faced by indirectly owned affiliates of American companies, these results suggest a greater sensitivity of FDI to taxes for non-American firms. The results also suggest that European economic integration may have the effect of intensifying tax competition between European jurisdictions.

JEL-codes: H25 H87 (search for similar items in EconPapers)
Date: 2002-09
New Economics Papers: this item is included in nep-ifn and nep-pub
Note: ITI PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

Published as Herrmann, Heinz and Robert Lipsey (eds.) Foreign Direct Investment in the Real and Financial Sector of Industrial Countries. Springer Verlag: Heidelberg, 2003.

Downloads: (external link)
http://www.nber.org/papers/w9224.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:9224

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w9224

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().