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What is the Marginal Source of Funds for Foreign Investment?

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  • Joosung Jun
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    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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    Bibliographic Info

    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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    1. Martin Feldstein & Jerry Green, 1979. "Why Do Companies Pay Dividends?," NBER Working Papers 0413, National Bureau of Economic Research, Inc.
    2. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
    3. Robert E. Lipsey & Mario Schimberni & Robert V. Lindsay, 1988. "Changing Patterns of International Investment in and by the United States," NBER Chapters, in: The United States in the World Economy, pages 475-558 National Bureau of Economic Research, Inc.
    4. James M. Poterba, 1987. "Tax Policy and Corporate Saving," Working papers 470, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Altshuler, Rosanne & Auerbach, Alan J, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 61-86, February.
    6. James R. Hines, Jr., 1988. "Taxation and U.S. Multinational Investment," NBER Chapters, in: Tax Policy and the Economy: Volume 2, pages 33-62 National Bureau of Economic Research, Inc.
    7. 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.
    8. Horst, Thomas, 1977. "American Taxation of Multinational Firms," American Economic Review, American Economic Association, American Economic Association, vol. 67(3), pages 376-89, June.
    9. 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.
    10. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, Elsevier, vol. 26(1), pages 107-121, February.
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    Cited by:
    1. Slemrod, J., 1990. "The Impact Of The Tax Reform Act Of 1986 On Foreign Direct Investment To And From The United States," Working Papers, Research Seminar in International Economics, University of Michigan 256, Research Seminar in International Economics, University of Michigan.
    2. Joosung Jun, 1990. "U.S. Tax Policy and Direct Investment Abroad," NBER Chapters, in: Taxation in the Global Economy, pages 55-78 National Bureau of Economic Research, Inc.

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