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Productivity and Taxes as Drivers of FDI

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  • Assaf Razin
  • Efraim Sadka

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 the likelihood of such flows to 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13094.

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Date of creation: May 2007
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Publication status: published as Productivity and Taxes as Drivers of Foreign Direct Investment [with Comments and Discussion] Assaf Razin, Efraim Sadka, Mihir A. Desai and Deborah Swenson "Brookings Trade Forum, Foreign Direct Investment" (2007), pp. 105-148 Published by: Brookings Institution Press
Handle: RePEc:nbr:nberwo:13094

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Cited by:
  1. Federica Liberini, 2014. "Corporate Taxes and the Growth of the Firm," KOF Working papers 14-354, KOF Swiss Economic Institute, ETH Zurich.
  2. Christian Keuschnigg, 2006. "Exports, Foreign Direct Investment and the Costs of Corporate Taxation," University of St. Gallen Department of Economics working paper series 2006 2006-17, Department of Economics, University of St. Gallen.
  3. Eicher, Theo S. & Helfman, Lindy & Lenkoski, Alex, 2012. "Robust FDI determinants: Bayesian Model Averaging in the presence of selection bias," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 637-651.
  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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