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What is the Marginal Source of Funds for Foreign Investment?

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Joosung Jun
Abstract

This paper analyzes the marginal source of funds for foreign investment using both aggregate and micro data on the intrafirm transactions of U.S. international firms. Tax arbitrage regarding the form and timing of transactions, combined with risks involved with foreign operations and the desire of the parent to control subsidiaries, suggests that parent transfers provide the marginal source of funds for most foreign investment. Our conclusion is consistent with the seemingly puzzling evidence that some subsidiaries have positive dividends and transfers simultaneously despite the associated tax penalties, and others neither pay dividends nor receive transfers. Our analysis and empirical evidence are in sharp conflict with the widely-held tax capitalization view that retained subsidiary earnings are the marginal source of financing foreign investment.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3064.

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Date of creation: Aug 1989
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Handle: RePEc:nbr:nberwo:3064

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kolpits, George F, 1972. "Dividend Remittance Behavior Within the International Firm: A Cross-country Analysis," The Review of Economics and Statistics, MIT Press, vol. 54(3), pages 339-42, August. [Downloadable!] (restricted)
  2. James M. Poterba, 1987. "Tax Policy and Corporate Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1987-2), pages 455-516. [Downloadable!]
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  3. Horst, Thomas, 1977. "American Taxation of Multinational Firms," American Economic Review, American Economic Association, vol. 67(3), pages 376-89, June.
  4. Jean-Thomas Bernard & Robert J. Weiner, 1989. "Multinational Corporations, Transfer Prices, and Taxes: Evidence from the U.S. Petroleum Industry," NBER Working Papers 3013, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Altshuler, Rosanne & Auerbach, Alan J, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 61-86, February. [Downloadable!] (restricted)
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  6. Feldstein, Martin & Green, Jerry, 1983. "Why Do Companies Pay Dividends?," American Economic Review, American Economic Association, vol. 73(1), pages 17-30, March. [Downloadable!] (restricted)
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  7. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February. [Downloadable!] (restricted)
  8. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring. [Downloadable!] (restricted)
  9. Robert E. Lipsey, 1988. "Changing Patterns of International Investment In and By the United States," NBER Working Papers 2240, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Joel Slemrod, 1990. "The Impact of the Tax Reform Act of 1986 on Foreign Direct Investment to and from the United States," NBER Working Papers 3234, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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