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Quality versus Quantity – The Composition Effect of Corporate Taxation on Foreign Direct Investment

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  • Johannes Becker
  • Clemens Fuest

Abstract

This paper studies corporate taxation in a model where foreign investment of firms may affect the profitability of the investor firm’s domestic activities. In this framework, corporate taxes distort the quality, not just the quantity of foreign direct investment flows. High-tax countries may see their tax revenues decrease in response to inbound foreign direct investment. Our results also imply that empirical studies on international profit shifting may overestimate the role of profit shifting. Observed profitability differences between high and low tax countries may be due to project selection. Empirical evidence in support of the main hypotheses is provided using aggregate investment and tax revenue data from a sample of OECD countries.

Suggested Citation

  • Johannes Becker & Clemens Fuest, 2007. "Quality versus Quantity – The Composition Effect of Corporate Taxation on Foreign Direct Investment," CESifo Working Paper Series 2126, CESifo.
    • Handle: RePEc:ces:ceswps:_2126
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    Cited by:

    1. Annette Alstadsæter & Salvador Barrios & Gaetan Nicodeme & Agnieszka Maria Skonieczna & Antonio Vezzani, 2018. "Patent boxes design, patents location, and local R&D," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 33(93), pages 131-177.
    2. Christoph Ernst & Katharina Richter & Nadine Riedel, 2013. "Corporate taxation and the quality of research & development," Working Papers 1301, Oxford University Centre for Business Taxation.
    3. Dischinger, Matthias, 2007. "Profit Shifting by Multinationals: Indirect Evidence from European Micro Data," Discussion Papers in Economics 2029, University of Munich, Department of Economics.
    4. Andreas Haufler & Frank Stähler, 2013. "Tax Competition In A Simple Model With Heterogeneous Firms: How Larger Markets Reduce Profit Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 665-692, May.
    5. Becker, Johannes & Fuest, Clemens, 2011. "Tax competition -- Greenfield investment versus mergers and acquisitions," Regional Science and Urban Economics, Elsevier, vol. 41(5), pages 476-486, September.
    6. Dischinger, Matthias, 2008. "Profit Shifting by Multinationals and the Ownership Share: Evidence from European Micro Data," Discussion Papers in Economics 5661, University of Munich, Department of Economics.
    7. Ortmann, Regina & Pummerer, Erich, 2015. "Formula apportionment or separate accounting? Tax-induced distortions of multinationals' locational investment decisions," arqus Discussion Papers in Quantitative Tax Research 198, arqus - Arbeitskreis Quantitative Steuerlehre.
    8. Dischinger, Matthias, 2010. "Multinational Enterprises and Corporate Taxation," Munich Dissertations in Economics 11147, University of Munich, Department of Economics.
    9. Johannes Becker & Clemens Fuest, 2007. "Corporate Tax Policy and International Mergers and Acquisitions – Is the Tax Exemption System Superior?," CESifo Working Paper Series 1884, CESifo.
    10. Christof Ernst & Katharina Richter & Nadine Riedel, 2014. "Corporate taxation and the quality of research and development," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(4), pages 694-719, August.
    11. Hristu-Varsakelis, Dimitrios & Karagianni, Stella & Saraidaris, Anastasios, 2011. "Equilibrium conditions in corporate tax competition and Foreign Direct Investment flows," Economic Modelling, Elsevier, vol. 28(1), pages 13-21.
    12. Riedel, Nadine & Böhm, Tobias & Karkinsky, Tom & Knoll, Bodo, 2015. "Corporate Taxes and Strategic Patent Location within Multinational Firms," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112978, Verein für Socialpolitik / German Economic Association.
    13. Griffith, Rachel & Miller, Helen & O'Connell, Martin, 2014. "Ownership of intellectual property and corporate taxation," Journal of Public Economics, Elsevier, vol. 112(C), pages 12-23.
    14. Hristu-Varsakelis, Dimitrios & Karagianni, Stella & Saraidaris, Anastasios, 2011. "Equilibrium conditions in corporate tax competition and Foreign Direct Investment flows," Economic Modelling, Elsevier, vol. 28(1-2), pages 13-21, January.
    15. Becker, Johannes & Fuest, Clemens & Riedel, Nadine, 2012. "Corporate tax effects on the quality and quantity of FDI," European Economic Review, Elsevier, vol. 56(8), pages 1495-1511.
    16. Martina Baumann & Tobias Boehm & Bodo Knoll & Nadine Riedel, 2020. "Corporate Taxes, Patent Shifting, and Anti-avoidance Rules: Empirical Evidence," Public Finance Review, , vol. 48(4), pages 467-504, July.
    17. Sandro Montresor & Francesco Quatraro, 2015. "Key Enabling Technologies and Smart Specialization Strategies. European Regional Evidence from patent data," JRC Working Papers on Corporate R&D and Innovation 2015-05, Joint Research Centre.
    18. Dischinger, Matthias & Riedel, Nadine, 2011. "Corporate taxes and the location of intangible assets within multinational firms," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 691-707, August.
    19. Giovanni Cerulli & Bianca Potì & Raffaele Spallone, 2018. "The impact of fiscal relief on multinationals business R&D investments: a cross-country analysis," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 35(2), pages 649-675, August.
    20. Matthias Dischinger & Nadine Riedel, 2009. "There's no Place like Home: The Profitability Gap between Headquarters and their Foreign Subsidiaries," CESifo Working Paper Series 2866, CESifo.
    21. Rudolf Macek, 2018. "Labour Taxation and its Impact on Economic Growth - Complex Analysis," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 1, pages 49-61, March.

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