How does FDI affect corporate tax revenue of the host country?
This paper investigates the effect of foreign direct investment (FDI) on the welfare of the host country through the process of corporate tax rate determination. Based on a theoretical model that allows for the entry of heterogenous multinational firms, we show that the impact of FDI on government revenue will depend on the competition effect and the technological spillovers. We argue that the competition effect reduces production of domestic firms and thereby lowers the level of corporate tax revenue while the technological spillovers can have positive or negative welfare effects depending on the absorptive capacity of local firms. The degree to which FDI contribute to government revenue in the host country depends also on the demand creation effect and technological transfer cost.
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- Sinani, Evis & Meyer, Klaus E., 2004. "Spillovers of technology transfer from FDI: the case of Estonia," Journal of Comparative Economics, Elsevier, vol. 32(3), pages 445-466, September.
- Salvador Barrios & Eric Strobl, 2002. "Foreign direct investment and productivity spillovers: Evidence from the Spanish experience," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 138(3), pages 459-481, September. Full references (including those not matched with items on IDEAS)
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