Fancy a Stay at the 'Hotel California'? Foreign Direct Investment, Taxation and Firing Costs
AbstractThis 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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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 665.
Length: 30 pages
Date of creation: Dec 2002
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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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