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Corporate Tax Cuts And Foreign Direct Investment

Author

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  • Leonardo Baccini
  • Quan Li
  • Irina Mirkina

Abstract

Accurate policy evaluation is central to optimal policymaking, but difficult to achieve. Most often, analysts have to work with observational data and cannot directly observe the counterfactual of a policy to assess its effect accurately. In this paper, we craft a quasi‐experimental design and apply two relatively new methods—the difference‐in‐differences estimation and the synthetic controls method—to the policy debate on whether corporate tax cuts increase foreign direct investment (FDI). The taxation–FDI relationship has attracted wide attention because of mixed findings. We exploit a quasi‐experimental design for Russian regions, which were granted autonomy to reduce corporate profit tax in 2003, enabling them to simultaneously experiment with different tax policies. We estimate both the average and local treatment effects of two types of tax cuts on FDI inflows. We find that, on average, relative to the absence of tax cuts, nondiscriminatory tax cuts on direct investment profit increase FDI, but discriminatory tax cuts on selected government‐sanctioned investment projects do not. Yet for both types of tax cuts, local treatment effects vary dramatically from region to region. Our research has important implications for the design of tax policy and fiscal incentive, and the assessment of fiscal policy reforms.

Suggested Citation

  • Leonardo Baccini & Quan Li & Irina Mirkina, 2014. "Corporate Tax Cuts And Foreign Direct Investment," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 33(4), pages 977-1006, September.
  • Handle: RePEc:wly:jpamgt:v:33:y:2014:i:4:p:977-1006
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    File URL: http://hdl.handle.net/10.1002/pam.21786
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    Citations

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    Cited by:

    1. Fabian J. Baier, 2020. "Foreign Direct Investment and Tax: OECD Gravity Modelling in a World with International Financial Institutions," Athens Journal of Business & Economics, Athens Institute for Education and Research (ATINER), vol. 6(1), pages 45-72, October.
    2. Bruno Ferman & Cristine Pinto & Vitor Possebom, 2020. "Cherry Picking with Synthetic Controls," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 39(2), pages 510-532, March.
    3. François, Abel & Panel, Sophie & Weill, Laurent, 2020. "Educated dictators attract more foreign direct investment," Journal of Comparative Economics, Elsevier, vol. 48(1), pages 37-55.
    4. Martin, Nigel & Rice, John, 2015. "Improving Australia's renewable energy project policy and planning: A multiple stakeholder analysis," Energy Policy, Elsevier, vol. 84(C), pages 128-141.
    5. Coates, Dennis & Mirkina, Irina, 2021. "Economic Freedom of the Russian Federation," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 51(1), January.
    6. Napoli, Philip M., 2015. "Social media and the public interest: Governance of news platforms in the realm of individual and algorithmic gatekeepers," Telecommunications Policy, Elsevier, vol. 39(9), pages 751-760.
    7. Alvaro Cuervo-Cazurra & Bernardo Silva-Rêgo & Ariane Figueira, 2022. "Financial and fiscal incentives and inward foreign direct investment: When quality institutions substitute incentives," Journal of International Business Policy, Palgrave Macmillan, vol. 5(4), pages 417-443, December.
    8. Marinela - Daniela Manea, 2016. "Corporate Social Responsibility between the Aim and the Reality of Implementation in the Romanian Companies," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 335-340.
    9. N. Manoharan, 2011. "Brothers, Not Friends," South Asian Survey, , vol. 18(2), pages 225-236, September.
    10. Abel FRANCOIS & Sophie PANEL & Laurent WEILL, 2018. "Are Some Dictators More Attractive to Foreign Investors?," Working Papers of LaRGE Research Center 2018-05, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    11. Fabian J. Baier, 2019. "Foreign Direct Investment and Tax: OECD Gravity Modelling in a World with International Financial Institutions," EIIW Discussion paper disbei261, Universitätsbibliothek Wuppertal, University Library.
    12. Suárez Sánchez, Ana & Krzemień, Alicja & Riesgo Fernández, Pedro & Iglesias Rodríguez, Francisco J. & Sánchez Lasheras, Fernando & de Cos Juez, F. Javier, 2015. "Investment in new tungsten mining projects," Resources Policy, Elsevier, vol. 46(P2), pages 177-190.
    13. Hong Zhuang & Miao Grace Wang & Imre Ersoy & Mesut Eren, 2023. "Does joining the European monetary union improve labor productivity? A synthetic control approach," Journal of Productivity Analysis, Springer, vol. 59(3), pages 287-306, June.
    14. repec:zbw:bofitp:2019_012 is not listed on IDEAS
    15. Sarah Bauerle Danzman & Alexander Slaski, 2022. "Incentivizing embedded investment: Evidence from patterns of foreign direct investment in Latin America," The Review of International Organizations, Springer, vol. 17(1), pages 63-87, January.
    16. Xie, En & Reddy, K.S. & Liang, Jie, 2017. "Country-specific determinants of cross-border mergers and acquisitions: A comprehensive review and future research directions," Journal of World Business, Elsevier, vol. 52(2), pages 127-183.
    17. Krzemień, Alicja & Riesgo Fernández, Pedro & Suárez Sánchez, Ana & Diego Álvarez, Isidro, 2016. "Beyond the pan-european standard for reporting of exploration results, mineral resources and reserves," Resources Policy, Elsevier, vol. 49(C), pages 81-91.
    18. Caballero, William N. & Lunday, Brian J. & Meissner, Finn, 2024. "Regulating the rebound effect in the traveling purchaser problem," European Journal of Operational Research, Elsevier, vol. 317(3), pages 660-677.
    19. Abel FRANCOIS & Sophie PANEL & Laurent WEILL, 2018. "Are Some Dictators More Attractive to Foreign Investors?," Working Papers of LaRGE Research Center 2018-05, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    20. Javier Garcia-Bernardo & Petr Janský & Thomas Tørsløv, 2022. "Decomposing Multinational Corporations’ Declining Effective Tax Rates," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(2), pages 338-381, June.
    21. Andrzej R. Stopczyński, 2020. "Banki na progu upadłości – refleksje nad postępowaniem," Bank i Kredyt, Narodowy Bank Polski, vol. 51(5), pages 517-548.

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