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A Pecking Order Theory of Capital Inflows and International Tax Principles


  • Razin, Assaf
  • Sadka, Efraim
  • Yuen, Chi-Wa


Even though financial markets today show a high degree of integration, the world capital market is still far from the textbook story of high capital mobility. The failure to have a tax scheme in which the rate of returns across countries are equated can result in inefficient capital flows across countries. This comes from the interactions of market failure and the tax system. The purpose of this paper is to highlight some key sources of market failure in the context of international capital flows and to provide guidelines for efficient tax structure in the presence of capital market imperfections. We distinguish among three main types of international capital flows: foreign portfolio debt investment (FPDI), foreign portfolio equity investment (FPEI), and foreign direct investment (FDI). The paper emphasizes the efficiency of non-uniform tax treatment of the various vehicles of international capital flows.

Suggested Citation

  • Razin, Assaf & Sadka, Efraim & Yuen, Chi-Wa, 1996. "A Pecking Order Theory of Capital Inflows and International Tax Principles," CEPR Discussion Papers 1381, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1381

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    References listed on IDEAS

    1. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    2. Gordon, Roger H. & Varian, Hal R., 1989. "Taxation of asset income in the presence of a world securities market," Journal of International Economics, Elsevier, vol. 26(3-4), pages 205-226, May.
    3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
    4. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    5. Paul A. Samuelson, 1956. "Social Indifference Curves," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 1-22.
    6. Claessens, Stijn, 1995. "The Emergence of Equity Investment in Developing Countries: Overview," World Bank Economic Review, World Bank Group, vol. 9(1), pages 1-17, January.
    7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    8. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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    Cited by:

    1. Jorge A. Chan-Lau & Zhaohui Chen, 1998. "Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation—with Reference to the Asian Financial Crisis," International Finance 9804001, EconWPA, revised 22 Sep 1998.

    More about this item


    Capital Inflows; Foreign Direct Investment; Foreign Portfolio Debt Investment; Foreign Portfolio Equity Investment; International Tax Principles;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General


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