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Fancy a Stay at the 'Hotel California'? Foreign Direct Investment, Taxation and Firing Costs

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  • Görg, Holger

    ()
    (Kiel Institute for the World Economy)

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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 665.

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Length: 30 pages
Date of creation: Dec 2002
Date of revision:
Handle: RePEc:iza:izadps:dp665

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Related research

Keywords: investment incentives; taxation; firing costs; exit costs; foreign direct investment;

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  1. 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.
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  15. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Munich Reprints in Economics 20408, University of Munich, Department of Economics.
  16. Flamm, Kenneth, 1984. "The volatility of offshore investment," Journal of Development Economics, Elsevier, vol. 16(3), pages 231-248, December.
  17. 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.
  18. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
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  20. n/a, 1999. "Generational Accounting in the UK," NIESR Discussion Papers 195, National Institute of Economic and Social Research.
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  22. 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.
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