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Productivity and Taxes as Drivers of FDI

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  • Assaf Razin

    (Tel-Aviv University, Cornell University, Centre for Economic Policy Research, National Bureau of Economic Research, CESifo and IZA, Hong Kong Institute for Monetary Research)

  • Efraim Sadka

    (Tel-Aviv University, CESifo and IZA)

Abstract

We develop a framework in which the host-country productivity has a positive effect on the intensive margin (the size of FDI flows), but only an ambiguous effect on the extensive margin (the likelihood of FDI flows to occur). The source-country productivity has a negative effect on the extensive margin. An increase in the host-country corporate tax rate reduces the actual FDI flows and the likelihood that such flows will occur. An increase in the source-country corporate tax rate reduces the likelihood of FDI flows. These predictions are confronted with data on FDI flows, drawn from the International Direct Investment dataset (Source OECD), covering the bilateral FDI flows among 18 OECD countries over the period 1987 to 2003. We find some support for the main predictions of the model.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 172007.

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Length: 34 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:hkm:wpaper:172007

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References

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  1. Reint Gropp & Kristina Kostial, 2000. "The Disappearing Tax Base," IMF Working Papers 00/173, International Monetary Fund.
  2. Gordon, Roger H. & Hines, James Jr, 2002. "International taxation," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 28, pages 1935-1995 Elsevier.
  3. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
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  5. Desai, Mihir A. & Foley, C. Fritz & Hines, James Jr., 2004. "Foreign direct investment in a world of multiple taxes," Journal of Public Economics, Elsevier, Elsevier, vol. 88(12), pages 2727-2744, December.
  6. Ruud A. de Mooij & Sjef Ederveen, 2001. "Taxation and Foreign Direct Investment: A Synthesis of Empirical Research," CESifo Working Paper Series 588, CESifo Group Munich.
  7. Michael P. Devereux & R. Glenn Hubbard, 2000. "Taxing Multinationals," NBER Working Papers 7920, National Bureau of Economic Research, Inc.
  8. Alan J. Auerbach & Kevin Hassett, 1991. "Taxation and Foreign Direct Investment in the United States: A Reconsideration of the Evidence," NBER Working Papers 3895, National Bureau of Economic Research, Inc.
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  14. Razin, Assaf & Sadka, Efraim, 2006. "Foreign Direct Investment: Analysis of Aggregate Flows," MPRA Paper 21916, University Library of Munich, Germany.
  15. Devereux, Michael P & Griffith, Rachel, 2003. "Evaluating Tax Policy for Location Decisions," International Tax and Public Finance, Springer, Springer, vol. 10(2), pages 107-26, March.
  16. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 17(35), pages 449-495, October.
  17. Heckman, James J, 1974. "Shadow Prices, Market Wages, and Labor Supply," Econometrica, Econometric Society, Econometric Society, vol. 42(4), pages 679-94, July.
  18. Gropp, Reint & Kostial, Kristina, 2000. "The disappearing tax base: is foreign direct investment eroding corporate income taxes?," Working Paper Series, European Central Bank 0031, European Central Bank.
  19. 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.
  20. 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.
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Cited by:
  1. Christian Keuschnigg, 2007. "Exports, Foreign Direct Investment and the Costs of Corporate Taxation," FIW Working Paper series, FIW 005, FIW.
  2. Federica Liberini, 2014. "Corporate Taxes and the Growth of the Firm," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 14-354, KOF Swiss Economic Institute, ETH Zurich.
  3. Theo S Eicher & Lindy Helfman & Alex Lenkoski, 2011. "Robust FDI Determinants: Bayesian Model Averaging In The Presence Of Selection Bias," Working Papers, University of Washington, Department of Economics UWEC-2011-07-FC, University of Washington, Department of Economics.
  4. 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.

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