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Tax sensitivity of foreign direct investment : an empirical assessment

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  • Shah, Anwar
  • Slemrod, Joel

Abstract

Tax sensitivity of foreign direct investment (FDI) has important policy implications. If FDI is not responsive to taxation, then it may be an appropriate target for taxation by the host country, which can raise revenue without sacrificing any economic benefits FDI produces. This paper examines the effects of taxation on FDI in Mexico. The empirical model used for this purpose distinguishes FDI finance by transfers and retained earnings and incorporates host and home country tax and non-tax factors including host country risk factors and credit status of multinationals. The paper concludes that empirical evidence on tax sensitivity of FDI in Mexico is quite strong. It suggests that FDI transfers and reinvested earnings respond negatively to the Mexican effective tax rate and to regulations. It is further dampened by the excess credit status of multinationals. It is encouraged by a favorable economic and political climate in Mexico, as indicated by the country credit rating of The Institutional Investor and by tariffs.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 434.

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Date of creation: 30 Jun 1990
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Handle: RePEc:wbk:wbrwps:434

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Keywords: International Terrorism&Counterterrorism; Banks&Banking Reform; Environmental Economics&Policies; Public Sector Economics&Finance; Economic Theory&Research;

References

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  1. Slemrod, J., 1990. "A North-South Model Of Taxation And Capital Flows," Working Papers 257, Research Seminar in International Economics, University of Michigan.
  2. James R. Hines, Jr. & R. Glenn Hubbard, 1990. "Coming Home To America: Dividend Repatriations By U.S. Multinationals," NBER Chapters, in: Taxation in the Global Economy, pages 161-208 National Bureau of Economic Research, Inc.
  3. Murthy, N.R. Vasudeva, 1989. "The Effects of Taxes and Rates of Return on Foreign Direct Investment in the United States: Some Econometric Comments," National Tax Journal, National Tax Association, vol. 42(2), pages 205-07, June.
  4. Auerbach, A.J. & Hines, Jr.J.R., 1988. "Investment Tax Incentives And Frequent Tax Reforms," Papers 135, Princeton, Woodrow Wilson School - Public and International Affairs.
  5. Alberto Giovannini, 1987. "International Capital Mobility and Tax Evasion," NBER Working Papers 2460, National Bureau of Economic Research, Inc.
  6. Bond, Eric W. & Samuelson, Larry, 1989. "Bargaining with commitment, choice of techniques, and direct foreign investment," Journal of International Economics, Elsevier, vol. 26(1-2), pages 77-97, February.
  7. Conrad, Robert F., 1989. "Considerations for the development of tax policy when capital is internationally mobile," Policy Research Working Paper Series 47, The World Bank.
  8. Auerbach, Alan, 1990. "The cost of capital and investment in developing countries," Policy Research Working Paper Series 410, The World Bank.
  9. Scholes, Myron S & Wolfson, Mark A, 1990. "The Effects of Changes in Tax Laws on Corporate Reorganization Activity," The Journal of Business, University of Chicago Press, vol. 63(1), pages S141-64, January.
  10. Slemrod, J., 1989. "Tax Effects Of Foreign Direct Investment In The U.S.: Evidence From A Cross-Country Comparison," Working Papers 254, Research Seminar in International Economics, University of Michigan.
  11. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1.
  12. Michael J. Boskin & William G. Gale, 1987. "New Results on the Effects of Tax Policy on the International Location of Investment," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 201-222 National Bureau of Economic Research, Inc.
  13. Young, Kan H., 1988. "The Effects of Taxes and Rates of Return on Foreign Direct Investment in the United States," National Tax Journal, National Tax Association, vol. 41(1), pages 109-21, March.
  14. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
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Citations

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Cited by:
  1. Nagesh Kumar, 2000. "Explaining the geography and depth of international production: The case of US and Japanese multinational enterprises," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(3), pages 442-477, 09.
  2. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February.
  3. Ram Mudambi, 1999. "Multinational Investment Attraction: Principal-Agent Considerations," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 6(1), pages 65-79.

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