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What is the Marginal Source of Funds for Foreign Investment?

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  • Joosung Jun

Abstract

This paper analyzes the marginal source of funds for foreign investment using both aggregate and micro data on the intrafirm transactions of U.S. international firms. Tax arbitrage regarding the form and timing of transactions, combined with risks involved with foreign operations and the desire of the parent to control subsidiaries, suggests that parent transfers provide the marginal source of funds for most foreign investment. Our conclusion is consistent with the seemingly puzzling evidence that some subsidiaries have positive dividends and transfers simultaneously despite the associated tax penalties, and others neither pay dividends nor receive transfers. Our analysis and empirical evidence are in sharp conflict with the widely-held tax capitalization view that retained subsidiary earnings are the marginal source of financing foreign investment.

Suggested Citation

  • Joosung Jun, 1989. "What is the Marginal Source of Funds for Foreign Investment?," NBER Working Papers 3064, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3064
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    References listed on IDEAS

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    1. Feldstein, Martin & Green, Jerry, 1983. "Why Do Companies Pay Dividends?," American Economic Review, American Economic Association, vol. 73(1), pages 17-30, March.
    2. Robert E. Lipsey & Mario Schimberni & Robert V. Lindsay, 1988. "Changing Patterns of International Investment in and by the United States," NBER Chapters,in: The United States in the World Economy, pages 475-558 National Bureau of Economic Research, Inc.
    3. Kolpits, George F, 1972. "Dividend Remittance Behavior Within the International Firm: A Cross-country Analysis," The Review of Economics and Statistics, MIT Press, vol. 54(3), pages 339-342, August.
    4. Jean-Thomas Bernard & Robert Weiner, 1990. "Multinational Corporations, Transfer Prices, and Taxes: Evidence from the U.S.Petroleum Industry," NBER Chapters,in: Taxation in the Global Economy, pages 123-160 National Bureau of Economic Research, Inc.
    5. Rosanne Altshuler & Alan J. Auerbach, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 61-86.
    6. James M. Poterba, 1987. "Tax Policy and Corporate Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(2), pages 455-516.
    7. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
    8. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
    9. Horst, Thomas, 1977. "American Taxation of Multinational Firms," American Economic Review, American Economic Association, vol. 67(3), pages 376-389, June.
    10. James R. Hines, Jr., 1988. "Taxation and U.S. Multinational Investment," NBER Chapters,in: Tax Policy and the Economy: Volume 2, pages 33-62 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Joel Slemrod, 1990. "The Impact of the Tax Reform Act of 1986 on Foreign Direct Investment to and from the United States," NBER Working Papers 3234, National Bureau of Economic Research, Inc.
    2. Joosung Jun, 1990. "U.S. Tax Policy and Direct Investment Abroad," NBER Chapters,in: Taxation in the Global Economy, pages 55-78 National Bureau of Economic Research, Inc.

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