Tax sensitivity of foreign direct investment: an empirical assessment

Anwar Shah and Joel Slemrod

No 434, Policy Research Working Paper Series from The World Bank

Abstract: Tax sensitivity of foreign direct investment (FDI) has important policy implications. If FDI is not responsive to taxation, then it may be an appropriate target for taxation by the host country, which can raise revenue without sacrificing any economic benefits FDI produces. This paper examines the effects of taxation on FDI in Mexico. The empirical model used for this purpose distinguishes FDI finance by transfers and retained earnings and incorporates host and home country tax and non-tax factors including host country risk factors and credit status of multinationals. The paper concludes that empirical evidence on tax sensitivity of FDI in Mexico is quite strong. It suggests that FDI transfers and reinvested earnings respond negatively to the Mexican effective tax rate and to regulations. It is further dampened by the excess credit status of multinationals. It is encouraged by a favorable economic and political climate in Mexico, as indicated by the country credit rating of The Institutional Investor and by tariffs.

Keywords: International Terrorism&Counterterrorism; Banks&Banking Reform; Environmental Economics&Policies; Public Sector Economics&Finance; Economic Theory&Research (search for similar items in EconPapers)
Date: 1990-06-30
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Citations: View citations in EconPapers (5)

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