Advanced Search
MyIDEAS: Login

Tax Policy and the Dynamic Demand for Domestic and Foreign Capital by Multinational Corporations

Contents:

Author Info

  • Altshuler, Rosanne
  • Cummins, Jason

Abstract

The extent to which domestic and foreign operations of multinational corporations (MNCs) are related has important implications for the analysis of investment demand and its responsiveness to tax policy. We estimate the structural parameters of a model in which domestic and foreign investment interact in two important ways. First, the MNC's production technology allows the marginal products of domestic and foreign capital to be interdependent. Second, the marginal adjustment costs of investment in one locaton may be affected by investment in other locations. We estimate the model using firm-level panel data from Canadian MNCs that invest solely in the United States. Our estimtes support the view that production and adjustment cost technologies are related. We find that domestic and foreign capital are greater than unit elastic substitutes and that investment in one location lowers the marginal adjustment cost of investment in the other location. We use our parameter estimates to simulate the effect of various tax policies on the growth of parent and affiliate capital stocks. The simulations demonstrate that allowing for interdependent capital demand across locations has important implications for the analysis of tax policy towards MNCs.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://econ.as.nyu.edu/docs/IO/9382/RR97-31.PDF
Download Restriction: no

Bibliographic Info

Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 97-31.

as in new window
Length: 40 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:cvs:starer:97-31

Contact details of provider:
Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
Phone: (212) 998-8936
Fax: (212) 995-3932
Email:
Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
More information through EDIRC

Order Information:
Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
Email:

Related research

Keywords: Production; investment; international factor substitution; international taxation;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  2. Pindyck, Robert S. & Rotemberg, Julio., 1982. "Dynamic factor demands under rational expectations," Working papers 1351-82., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Bizer, David S & Judd, Kenneth L, 1989. "Taxation and Uncertainty," American Economic Review, American Economic Association, vol. 79(2), pages 331-36, May.
  4. Epstein, Larry G. & Yatchew, Adonis J., 1985. "The empirical determination of technology and expectations : A simplified procedure," Journal of Econometrics, Elsevier, vol. 27(2), pages 235-258, February.
  5. Rossana, Robert J, 1990. "Interrelated Demands for Buffer Stocks and Productive Inputs: Estimates for Two-Digit Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 19-29, February.
  6. Alan J. Auerbach & James R. Hines Jr., 1988. "Anticipated Tax Changes and the Timing of Investment," NBER Working Papers 1886, National Bureau of Economic Research, Inc.
  7. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  8. Pindyck, Robert S, 1982. "Adjustment Costs, Uncertainty, and the Behavior of the Firm," American Economic Review, American Economic Association, vol. 72(3), pages 415-27, June.
  9. Martin Feldstein, 1982. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Working Papers 0947, National Bureau of Economic Research, Inc.
  10. Jason G. Cummins & R. Glenn Hubbard, 1994. "The Tax Sensitivity of Foreign Direct Investment: Evidence from Firm-Level Panel Data," NBER Working Papers 4703, National Bureau of Economic Research, Inc.
  11. R. Glenn Hubbard & Anil Kashyap, 1990. "Internal Net Worth and the Investment Process: An Application to U.S. Agriculture," NBER Working Papers 3339, National Bureau of Economic Research, Inc.
  12. Martin Feldstein & James R. Hines Jr. & R. Glenn Hubbard, 1995. "The Effects of Taxation on Multinational Corporations," NBER Books, National Bureau of Economic Research, Inc, number feld95-2, octubre-d.
  13. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
  14. Auerbach, Alan J & Hines, James R, Jr, 1988. "Investment Tax Incentives and Frequent Tax Reforms," American Economic Review, American Economic Association, vol. 78(2), pages 211-16, May.
  15. Rosanne Altshuler & Harry Grubert, 1996. "Balance Sheets, Multinational Financial Policy, and the Cost of Capital at Home and Abroad," NBER Working Papers 5810, National Bureau of Economic Research, Inc.
  16. Shapiro, Matthew D, 1986. "The Dynamic Demand for Capital and Labor," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 513-42, August.
  17. Daniel S. Hamermesh & Gerard A. Pfann, 1996. "Adjustment Costs in Factor Demand," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1264-1292, September.
  18. Ellen R. McGrattan, 1993. "Solving the stochastic growth model with a finite element method," Staff Report 164, Federal Reserve Bank of Minneapolis.
  19. Alan J. Auerbach & Kevin Hassett, 1992. "Tax Policy and Business Fixed Investment in the United States," NBER Working Papers 3619, National Bureau of Economic Research, Inc.
  20. Alan J. Auerbach, 1990. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," NBER Working Papers 2103, National Bureau of Economic Research, Inc.
  21. Jason G. Cummins & Trevor S. Harris & Kevin A. Hassett, 1994. "Accounting Standards, Information Flow, and Firm Investment Behavior," NBER Working Papers 4685, National Bureau of Economic Research, Inc.
  22. Hassett, Kevin A. & Hubbard, R. Glenn, 2002. "Tax policy and business investment," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 20, pages 1293-1343 Elsevier.
  23. James R. Hines Jr., 1994. "Credit and Deferral as International Investment Incentives," NBER Working Papers 4191, National Bureau of Economic Research, Inc.
  24. Holly, Sean & Smith, Peter, 1989. "Interrelated factor demands for manufacturing: A dynamic translog cost function approach," European Economic Review, Elsevier, vol. 33(1), pages 111-126, January.
  25. Robert E. Lipsey & Guy V.G. Stevens, 1992. "Interactions between Domestic and Foreign Investment," NBER Working Papers 2714, National Bureau of Economic Research, Inc.
  26. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
  27. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  28. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1996. "Tax Reforms and Investment: A Cross-Country Comparison," NBER Working Papers 5232, National Bureau of Economic Research, Inc.
  29. Rosanne Altshuler & Jack Mintz, 1995. "U.S. interest-allocation rules: Effects and policy," International Tax and Public Finance, Springer, vol. 2(1), pages 7-35, February.
  30. Maurice Obstfeld, 1986. "Capital Mobility in the World Economy: Theory and Measurement," NBER Working Papers 1692, National Bureau of Economic Research, Inc.
  31. Bernstein, Jeffrey I. & Nadiri, M. Ishaq, 1988. "Corporate Taxes And Incentives And The Structure Of Production: A Selected Survey," Working Papers 88-11, C.V. Starr Center for Applied Economics, New York University.
  32. Martin S. Feldstein, 1995. "The Effects of Outbound Foreign Direct Investment on the Domestic Capital Stock," NBER Chapters, in: The Effects of Taxation on Multinational Corporations, pages 43-66 National Bureau of Economic Research, Inc.
  33. Michael Dooley & Jeffrey Frankel & Donald J. Mathieson, 1987. "International Capital Mobility: What Do Saving-Investment Correlations Tell Us?," IMF Staff Papers, Palgrave Macmillan, vol. 34(3), pages 503-530, September.
  34. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 1-74.
  35. Pindyck, Robert S & Rotemberg, Julio J, 1983. "Dynamic Factor Demands and the Effects of Energy Price Shocks," American Economic Review, American Economic Association, vol. 73(5), pages 1066-79, December.
  36. Leamer, Edward E, 1988. "The Sensitivity of International Comparisons of Capital Stock Measures to Different "Real" Exchange Rates," American Economic Review, American Economic Association, vol. 78(2), pages 479-83, May.
  37. Nadiri, M Ishaq & Rosen, Sherwin, 1969. "Interrelated Factor Demand Functions," American Economic Review, American Economic Association, vol. 59(4), pages 457-71, Part I Se.
  38. Prucha, Ingmar R. & Nadiri, M. Ishaq, 1996. "Endogenous capital utilization and productivity measurement in dynamic factor demand models Theory and an application to the U.S. electrical machinery industry," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 343-379.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cvs:starer:97-31. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anne Stubing).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.