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Does Cancellation of Preferential Tax Policy Reduce Foreign Direct Investment Inflows?

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  • Zhi Luo
  • Chen Wang
  • Xun Zhang

Abstract

In light of recent tax cuts by the US, should China reintroduce a preferential tax policy to attract foreign direct investment? This paper investigates whether China's 2008 tax policy change affected inward foreign direct investment. In contrast to previous studies, we break foreign investment down into suspect and real foreign investment using firm‐level data from 1998 to 2008 and conduct a difference‐in‐difference estimation to determine the effect of the tax policy change on both types of foreign investment and compare these to the effect on domestic investment. The results show that the 2008 tax policy change reduced the amount of suspect foreign investment and its effect on real foreign investment was insignificant, indicating that foreign firms in China are more concerned with the investment environment and economic stability than taxes. Therefore, China should create a regulated business environment instead of readopting supernational treatment for foreign enterprises.

Suggested Citation

  • Zhi Luo & Chen Wang & Xun Zhang, 2018. "Does Cancellation of Preferential Tax Policy Reduce Foreign Direct Investment Inflows?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 26(6), pages 97-115, November.
  • Handle: RePEc:bla:chinae:v:26:y:2018:i:6:p:97-115
    DOI: 10.1111/cwe.12263
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    1. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 149-182.
    2. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-293, May.
    3. Mutti, John & Grubert, Harry, 2004. "Empirical asymmetries in foreign direct investment and taxation," Journal of International Economics, Elsevier, vol. 62(2), pages 337-358, March.
    4. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
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