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Altered States: Taxes and the Location of Foreign Direct Investment in America

  • James R. Hines Jr.

This paper examines the effect of taxation on foreign investment and on business location within the United States. The idea is to compare the inter-state distribution of investments from certain foreign countries (those with foreign tax credit systems) with the distribution of investments from other countries. Investors from countries with foreign tax credit systems receive home-country tax credits for income taxes paid to US states, so they are less likely than are other investors to avoid investing in high-tax states. The results indicate that 1% differences in state corporate tax rates are associated with 7-9% differences between the investment shares of foreign tax credit investors and the investment shares of all others, suggesting that state taxes significantly influence the pattern of foreign direct investment in the US.

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File URL: http://www.nber.org/papers/w4397.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4397.

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Date of creation: Jul 1993
Date of revision:
Publication status: published as American Economic Review, December 1996, vol.86, no.5, pp.1076-1094.
Handle: RePEc:nbr:nberwo:4397
Note: PE
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  1. James R. Hines, Jr. & Eric M. Rice, 1990. "Fiscal Paradise: Foreign Tax Havens and American Business," NBER Working Papers 3477, National Bureau of Economic Research, Inc.
  2. Alan J. Auerbach & Kevin Hassett, 1991. "Taxation and Foreign Direct Investment in the United States: A Reconsideration of the Evidence," NBER Working Papers 3895, National Bureau of Economic Research, Inc.
  3. Hans-Werner Sinn, 1990. "Taxation and the Birth of Foreign Subsidiaries," NBER Working Papers 3519, National Bureau of Economic Research, Inc.
  4. H. Brinton Milward & Heidi Hosbach Newman, 1989. "State Incentive Packages and the Industrial Location Decision," Economic Development Quarterly, , vol. 3(3), pages 203-222, August.
  5. Bartik, Timothy J, 1985. "Business Location Decisions in the United States: Estimates of the Effects of Unionization, Taxes, and Other Characteristics of States," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(1), pages 14-22, January.
  6. Michael J. Boskin & William G. Gale, 1987. "New Results on the Effects of Tax Policy on the International Location of Investment," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 201-222 National Bureau of Economic Research, Inc.
  7. Klein, Michael W. & Rosengren, Eric, 1994. "The real exchange rate and foreign direct investment in the United States : Relative wealth vs. relative wage effects," Journal of International Economics, Elsevier, vol. 36(3-4), pages 373-389, May.
  8. Hines, J.R., 1990. "The Transfer Pricing Problem: Where The Profit Are," Papers 64, Princeton, Woodrow Wilson School - Discussion Paper.
  9. Hines, James Jr., 1994. "Credit and deferral as international investment incentives," Journal of Public Economics, Elsevier, vol. 55(2), pages 323-347, October.
  10. David G. Hartman, 1981. "Domestic Tax Policy and Foreign Investment: Some Evidence," NBER Working Papers 0784, National Bureau of Economic Research, Inc.
  11. Swenson, Deborah L., 1994. "The impact of U.S. tax reform on foreign direct investment in the United States," Journal of Public Economics, Elsevier, vol. 54(2), pages 243-266, June.
  12. Newman, Robert J. & Sullivan, Dennis H., 1988. "Econometric analysis of business tax impacts on industrial location: What do we know, and how do we know it?," Journal of Urban Economics, Elsevier, vol. 23(2), pages 215-234, March.
  13. Carlton, Dennis W, 1983. "The Location and Employment Choices of New Firms: An Econometric Model with Discrete and Continuous Endogenous Variables," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 440-49, August.
  14. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
  15. James R. Hines, Jr. & R. Glenn Hubbard, 1990. "Coming Home to America: Dividend Repatriations by U.S. Multinationals," NBER Working Papers 2931, National Bureau of Economic Research, Inc.
  16. Newman, Robert J, 1983. "Industry Migration and Growth in the South," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 76-86, February.
  17. Coughlin, Cletus C & Terza, Joseph V & Arromdee, Vachira, 1991. "State Characteristics and the Location of Foreign Direct Investment within the United States," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 675-83, November.
  18. Joel B. Slemrod, 1990. "Tax Effects on Foreign Direct Investment in the United States: Evidence from a Cross-Country Comparison," NBER Chapters, in: Taxation in the Global Economy, pages 79-122 National Bureau of Economic Research, Inc.
  19. Hines, J.R., 1990. "The Flight Paths Of Migratory Corporations," Papers 65, Princeton, Woodrow Wilson School - Discussion Paper.
  20. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
  21. Robert E. Lipsey, 1992. "Foreign Direct Investment in the U.S.: Changes Over Three Decades," NBER Working Papers 4124, National Bureau of Economic Research, Inc.
  22. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1.
  23. Gordon, Roger H & Wilson, John Douglas, 1986. "An Examination of Multijurisdictional Corporate Income Taxation under Formula Apportionment," Econometrica, Econometric Society, vol. 54(6), pages 1357-73, November.
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