Corporate Taxation and Bilateral FDI with Threshold Barriers / Assaf Razin, Yona Rubinstein, Efraim Sadka.

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Razin, Assaf

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w11196.Publication details: Cambridge, Mass. National Bureau of Economic Research 2005.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: The paper brings out the special mechanism through which taxes influence bilateral FDI, when investment decisions are two-fold in the presence of fixed setup flows costs. For each pair of source-host countries, there is a set of factors determining whether aggregate FDI flows will occur at all, and a different set of factors determimnig the volume of FDI flows (provided that they occur). We demonstrate that the notion that the mere international tax differetials are a key factor behind the direction and magnitude of FDI flows is too simple. We argue that the source country tax rate works primarely on the selection process, whereas the host-country tax rate affect mainly the magnitude of the FDI, once they occur. We analyze international panel data with 24 OECD countries over the period 1981-1998 by the Heckman selection method to bring evidence in support of this argument.

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Previous	nber w11193 Financial Markets and the Real Economy /	nber w11194 Testing, Crime and Punishment /	nber w11195 Names, Expectations and the Black-White Test Score Gap /	nber w11196 Corporate Taxation and Bilateral FDI with Threshold Barriers /	nber w11197 Do Firms Go Public to Raise Capital? /	nber w11198 The IMF in a World of Private Capital Markets /	nber w11199 Slow Passthrough Around the World: A New Import for Developing Countries? /	Next

March 2005.

The paper brings out the special mechanism through which taxes influence bilateral FDI, when investment decisions are two-fold in the presence of fixed setup flows costs. For each pair of source-host countries, there is a set of factors determining whether aggregate FDI flows will occur at all, and a different set of factors determimnig the volume of FDI flows (provided that they occur). We demonstrate that the notion that the mere international tax differetials are a key factor behind the direction and magnitude of FDI flows is too simple. We argue that the source country tax rate works primarely on the selection process, whereas the host-country tax rate affect mainly the magnitude of the FDI, once they occur. We analyze international panel data with 24 OECD countries over the period 1981-1998 by the Heckman selection method to bring evidence in support of this argument.