Investors can achieve international diversification in their portfolios not only through purchasing foreign equity directly but also through investing in domestic firms which then invest abroad. Yet these alternative approaches are taxed very differently. A number of countries have also imposed various forms of capital controls restricting direct purchases of foreign equity. This paper estimates the degree to which these tax and nontax factors have affected the relative use of these two alternative methods of international diversification, using data on investment in the U.S. by investors from each of ten other countries during the period 1980-1989. While the composition of equity flows differs dramatically across countries, taxes do not appear to play an important role in the data in explaining this variation. Part of the explanation appears to be that tax distortions adjust endogenously to avoid large scale portfolio investments abroad. With the increasing integration of capital markets and the easing of capital controls in many countries, we have seen and expect to continue to see reductions in the tax distortions affecting the form of international capital flows.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
4159.
Length: Date of creation: Sep 1992 Date of revision: Publication status: published relationship to a non-chapter. This should not happen. Please contact NBER. Handle: RePEc:nbr:nberwo:4159
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Martin Feldstein, 1983.
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National Bureau of Economic Research, Inc.
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Roger H. Gordon & James R. Hines Jr., 2002.
"International Taxation,"
NBER Working Papers
8854, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Gordon, Roger H. & Hines, James Jr, 2002.
"International taxation,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 28, pages 1935-1995
Elsevier.
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