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Fancy a stay at the "Hotel California "?Foreign Direct Investment,Taxation and Exit Costs

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Author Info
Holger Görg

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Abstract

This paper looks at the trade off between investment incentives and exit costs for the location of foreign direct investment (FDI). This issue does not appear to have been tackled in much detail in the literature. The analysis considers the effect of profit taxation (as a measure of investment incentives) and an index of hiring and firing costs (proxying exit costs) on the location of US outward FDI in 33 host countries. The results suggest that US FDI, in particular in manufacturing is negatively affected by the level of profit taxation and exit costs. Hence, if countries want to attract FDI it may not suffice that incentives are provided in order to ease the entry of multinationals. Instead, it also appears to be important that exit costs are at a level attractive to multinationals. In other words, multinationals may not check into an attractive looking Hotel California type host country if it is difficult to leave.

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Publisher Info
Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 96.

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Length: 35 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:dnb:staffs:96

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Related research
Keywords: Foreign direct investment; exit costs; firing costs; investment incentives; taxation;

Find related papers by JEL classification:
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings

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  1. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-44, September. [Downloadable!] (restricted)
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    Other versions:
  3. Haaland, Jan I. & Wooton, Ian, 2002. "Multinational Investment, Industry Risk and Policy Competition," CEPR Discussion Papers 3152, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January. [Downloadable!] (restricted)
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  7. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June. [Downloadable!] (restricted)
    Other versions:
  8. Roberts, Mark J & Tybout, James R, 1997. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, American Economic Association, vol. 87(4), pages 545-64, September. [Downloadable!] (restricted)
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    Other versions:
  10. Görg, Holger & Strobl, Eric, 2002. "'Footloose' Multinationals?," CEPR Discussion Papers 3402, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Assaf Razin & Ashoka Mody & Efraim Sadka, 2002. "The Role of Information in Driving FDI: Theory and Evidence," NBER Working Papers 9255, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. J Bradford Jensen & Andrew B Bernard, 2001. "Why Some Firms Export," Working Papers 01-05, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
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  13. Schneider, Friedrich & Frey, Bruno S., 1985. "Economic and political determinants of foreign direct investment," World Development, Elsevier, vol. 13(2), pages 161-175, February. [Downloadable!] (restricted)
  14. Robert E. Lipsey, 2001. "Foreign Direct Investment and the Operations of Multinational Firms: Concepts, History, and Data," NBER Working Papers 8665, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February. [Downloadable!] (restricted)
    Other versions:
  16. Girma, Sourafel & Greenaway, David & Wakelin, Katharine, 2001. "Who Benefits from Foreign Direct Investment in the UK?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(2), pages 119-33, May. [Downloadable!] (restricted)
  17. Flamm, Kenneth, 1984. "The volatility of offshore investment," Journal of Development Economics, Elsevier, vol. 16(3), pages 231-248, December. [Downloadable!] (restricted)
  18. Head, C. Keith & Ries, John C. & Swenson, Deborah L., 1999. "Attracting foreign manufacturing: Investment promotion and agglomeration," Regional Science and Urban Economics, Elsevier, vol. 29(2), pages 197-218, March. [Downloadable!] (restricted)
  19. Sofronis Clerides & Saul Lach & James Tybout, 1996. "Is "Learning-by-Exporting" Important? Micro-Dynamic Evidence from Colombia, Mexico and Morocco," NBER Working Papers 5715, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Devereux, Michael P. & Griffith, Rachel, 1998. "Taxes and the location of production: evidence from a panel of US multinationals," Journal of Public Economics, Elsevier, vol. 68(3), pages 335-367, June. [Downloadable!] (restricted)
    Other versions:
  21. Campa, Joe Manuel, 1993. "Entry by Foreign Firms in the United States under Exchange Rate Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 614-22, November. [Downloadable!] (restricted)
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