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Productivity and Taxes as Drivers of FDI

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  • Razin, Assaf
  • Sadka, Efraim

Abstract

We study the role of productivity and corporate taxation as driving forces of FDI among OECD countries in the presence of threshold barriers, which generate two margins for FDI decisions. Some simulations, based on the estimation results, suggest that there are marked differences in the sensitivity of FDI flows from the U.S. to productivity and taxes in OECD countries. Data on FDI flows are drawn from the International Direct Investment dataset (Source OECD), covering the bilateral FDI flows among 18 OECD countries over the period 1987 to 2003.The sensitivity of these flows to productivity in the U.K. is positive and high, relative to other EU countries and Japan. Similarly, the sensitivity of these flows to taxes in the U.K is negative and high, relative to other EU countries and Japan.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6299.

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Date of creation: May 2007
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Handle: RePEc:cpr:ceprdp:6299

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Keywords: corporate taxation; Foreign direct investment; productivity; selection and flow equations;

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  1. Reint Gropp & Kristina Kostial, 2000. "The Disappearing Tax Base," IMF Working Papers 00/173, International Monetary Fund.
  2. de Mooij, Ruud A & Ederveen, Sjef, 2003. "Taxation and Foreign Direct Investment: A Synthesis of Empirical Research," International Tax and Public Finance, Springer, vol. 10(6), pages 673-93, November.
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  4. Devereux, Michael P & Griffith, Rachel, 2002. "Evaluating Tax Policy for Location Decisions," CEPR Discussion Papers 3247, C.E.P.R. Discussion Papers.
  5. Roger H. Gordon & James R. Hines Jr., 2002. "International Taxation," NBER Working Papers 8854, National Bureau of Economic Research, Inc.
  6. Razin, Assaf & Sadka, Efraim, 2006. "Foreign Direct Investment: Analysis of Aggregate Flows," MPRA Paper 21916, University Library of Munich, Germany.
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  9. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
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  14. Heckman, James J, 1974. "Shadow Prices, Market Wages, and Labor Supply," Econometrica, Econometric Society, vol. 42(4), pages 679-94, July.
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  17. Agnès Bénassy-Quéré & Lionel Fontagné & Amina Lahrèche-Revil, 2000. "Foreign Direct Investment and the Prospects for Tax Co-Ordination in Europe," Working Papers 2000-06, CEPII research center.
  18. Amiti, Mary, 2001. "Location of Vertically Linked Industries: Agglomeration versus Comparative Advantage," CEPR Discussion Papers 2800, C.E.P.R. Discussion Papers.
  19. Gropp, Reint & Kostial, Kristina, 2000. "The disappearing tax base: is foreign direct investment eroding corporate income taxes?," Working Paper Series 0031, European Central Bank.
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  21. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
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Citations

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Cited by:
  1. Christian Keuschnigg, 2006. "Exports, Foreign Direct Investment and the Costs of Corporate Taxation," University of St. Gallen Department of Economics working paper series 2006 2006-17, Department of Economics, University of St. Gallen.
  2. Liberini, Federica, 2014. "Corporate Taxes and the Growth of the Firm," The Warwick Economics Research Paper Series (TWERPS) 1042, University of Warwick, Department of Economics.
  3. Federica Liberini, 2014. "Corporate Taxes and the Growth of the Firm," KOF Working papers 14-354, KOF Swiss Economic Institute, ETH Zurich.
  4. Eicher, Theo S. & Helfman, Lindy & Lenkoski, Alex, 2012. "Robust FDI determinants: Bayesian Model Averaging in the presence of selection bias," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 637-651.

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