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The impact of endogenous tax treaties on foreign direct investment: theory and evidence

Author

Listed:
  • Peter Egger
  • Mario Larch
  • Michael Pfaffermayr
  • Hannes Winner

Abstract

This paper investigates the effect of tax treaties on bilateral stocks of outward FDI. For this purpose we employ a numerically solvable general equilibrium model of trade and multinational firms to study the impact of tax treaties on both welfare and outward FDI. The model indicates under which factor endowment configurations countries gain in welfare when implementing a tax treaty. This motivates an empirical specification of the endogenous selection into implementing new tax treaties. Using data of bilateral OECD outward FDI between 1985 and 2000, we find a significant negative impact of newly implemented tax treaties on outward FDI stocks.

Suggested Citation

  • Peter Egger & Mario Larch & Michael Pfaffermayr & Hannes Winner, 2006. "The impact of endogenous tax treaties on foreign direct investment: theory and evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 39(3), pages 901-931, August.
    • Handle: RePEc:cje:issued:v:39:y:2006:i:3:p:901-931
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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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