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How Does FDI React to Corporate Taxation?

Listed author(s):
  • Agnès Bénassy-Quéré

    ()

    (CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique)

  • Lionel Fontagné

    ()

    (CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique, TEAM - Théories et Applications en Microéconomie et Macroéconomie - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Amina Lahreche-Révil

    (CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique)

Using a panel of bilateral FDI flows for 11 OECD countries over 1984-2000, we show that, although agglomeration-related factors are strong determinants of FDI, tax differentials also play a significant role in understanding foreign location decisions. We further investigate non-linearities in the impact of tax differentials, and explore the role of tax schemes. We show that the reaction of FDI inflows to tax differentials is non-linear: it depends on the magnitude of the tax gap, on the sign of this gap, and on the nature of bilateral tax schemes in operation (credit vs. exemption). Our results are consistent with the imperfect competition literature which underscores the possibility of tax differentials across countries in equilibrium.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-00270515.

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Date of creation: Sep 2005
Publication status: Published in International Tax and Public Finance, Springer Verlag, 2005, 12 (5), pp.583-603. <10.1007/s10797-005-2652-4>
Handle: RePEc:hal:cesptp:hal-00270515
DOI: 10.1007/s10797-005-2652-4
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00270515
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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