How taxation affects foreign direct investment (country - specific evidence)

Joosung Jun

No 1307, Policy Research Working Paper Series from The World Bank

Abstract: The author estimates empirically the degree to which the tax systems of both home and host countries affect foreign direct investment (FDI). He presents evidence that tax rules significantly affect capital flow fromFDI. Home country taxes in particular appear to significantly affect the behavior of FDI. By identifying the incentives associated with different tax parameters in the home and host countries, the author identifies different channels through which taxes affect FDI. The home-country statutory tax rate is claimed to measure the incentive effect of potential home-country surtaxes on new FDI; the home-country effective tax rate is shown to measure how taxes affect the substitution of investment in one country for investment in another. The host country's effective tax rate should represent either the incentives for FDI in that country or simply the amount of foreign tax payments that are creditable against the home tax liability on the FDI. The most robust of the statistical results - using data on investment in the United States by ten other countries between 1980 and 1989 - shows that the home-country statutory tax rate significantly hurts FDI when the country makes foreign-source income subject to home-country taxation. (The same variable has no significant effect on FDI from those countries that exempt foreign-source income from home-country taxation.) The author found that the coefficient of the home country's statutory and effective tax rates take the opposite sign in the estimated equations; this supports the presence of different channels through which home country tax systems influence FDI. The weak performance of the host-country tax variable in the estimated equations suggests that the host-country tax does not affect decisions about where to invest FDI as much as is conventionally perceived. The host country tax largely represents credible foreign taxes for many investors.

Keywords: Environmental Economics&Policies; Economic Theory&Research; Public Sector Economics&Finance; International Terrorism&Counterterrorism; National Governance (search for similar items in EconPapers)
Date: 1994-06-30
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Citations: View citations in EconPapers (14)

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