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Playing Easy or Playing Hard to Get: When and How to Attract FDI

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  • Thomas A. Gresik
  • Dirk Schindler
  • Guttorm Schjelderup

Abstract

We study the link between a country’s institutional quality in tax collection and its optimal corporate tax policies in a model of heterogeneous multinationals that can shift income using both debt and transfer prices. Countries with weak institutional quality can be made worse off adopting policies that attract FDI as the benefits from higher wages and production are more than offset by tax base erosion. Countries with moderate institutional quality can gain from under-utilizing their ability to collect taxes, since the benefit of attracting more FDI outstrips the benefit of increased tax revenue. Countries with very strong institutions benefit from FDI and should utilize their full ability to collect taxes.

Suggested Citation

  • Thomas A. Gresik & Dirk Schindler & Guttorm Schjelderup, 2020. "Playing Easy or Playing Hard to Get: When and How to Attract FDI," CESifo Working Paper Series 8415, CESifo.
    • Handle: RePEc:ces:ceswps:_8415
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    Cited by:

    1. M. Mardan, 2023. "The unintended consequences of semi‐autonomous revenue agencies," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(3), pages 1063-1081, August.
    2. Andreas Haufler & Hirofumi Okoshi & Dirk Schindler, 2025. "Will the Global Minimum Tax Hurt Developing Countries?," CESifo Working Paper Series 12329, CESifo.

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    Keywords

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    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • F68 - International Economics - - Economic Impacts of Globalization - - - Policy

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