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Tax differentials and inflow of foreign direct investments : evidence from foreign operations of U.S. multinational companies

  • Watanabe, Yuichi
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    This paper concerns the measurement of the impact of tax differentials across countries on inflow of Foreign Direct Investment (FDI) by using comprehensive data on the foreign operations of U.S. multinational corporations that has been collected by the Bureau of Economic Analysis (BEA), the U.S. Department of Commerce. In particular, this research focuses on examining: (1) how responsive FDI locations are to tax differentials across countries, (2) how different the tax effect on FDI inflow is between developed and developing countries, and (3) whether investment location decisions have become more or less sensitive to tax differences between countries over time ranging from the late 1990s to the early 2000s. Estimation results suggest that high rates of corporate income taxation are associated with reduced foreign assets of U.S. multinational firms in all industries by decreasing the return to foreign asset investment. Further, foreign assets of U.S. multinationals in all industries have become more responsive to non-income tax differentials across countries than to income tax differences from 1999 to 2004. Empirical estimates also indicate that foreign investment by American firms is associated with higher tax sensitivity more in developed countries than in those that are developing.

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    File URL: http://ir.ide.go.jp/dspace/bitstream/2344/925/1/ARRIDE_Discussion_No.263_watanabe.pdf
    File Function: First version, 2010
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    Paper provided by Institute of Developing Economies, Japan External Trade Organization(JETRO) in its series IDE Discussion Papers with number 263.

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    Date of creation: Dec 2010
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    Publication status: Published in IDE Discussion Paper. No. 263. 2010.12
    Handle: RePEc:jet:dpaper:dpaper263
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    1. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
    2. James R. Hines Jr., 1993. "Altered States: Taxes and the Location of Foreign Direct Investment in America," NBER Working Papers 4397, National Bureau of Economic Research, Inc.
    3. Mihir A. Desai & James R. Hines Jr., 2001. "Foreign Direct Investment in a World of Multiple Taxes," NBER Working Papers 8440, National Bureau of Economic Research, Inc.
    4. Rosanne Altshuler & R. Glenn Hubbard, 2000. "The Effect of the Tax Reform Act of 1986 on the Location of Assets in Financial Services Firms," NBER Working Papers 7903, National Bureau of Economic Research, Inc.
    5. Hines, James R. (ed.), 2001. "International Taxation and Multinational Activity," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226341736.
    6. Auerbach, Alan J & Hines, James R, Jr, 1988. "Investment Tax Incentives and Frequent Tax Reforms," American Economic Review, American Economic Association, vol. 78(2), pages 211-16, May.
    7. Tanzi, Vito & Zee, Howell H., 2000. "Tax Policy for Emerging Markets: Developing Countries," National Tax Journal, National Tax Association, vol. 53(n. 2), pages 299-322, June.
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