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Taxes, Leverage and the National Return on Outbound Foreign Direct Investment


  • Martin Feldstein


The effect of outbound foreign direct investment (FDI) on the national income of the parent firm's country depends on the relative importance of two countervailing factors: the loss of tax revenue to the foreign government and the increased use of foreign debt. The present paper develops an explicit analysis of these two factors in the context of the segmented international capital market in which most national saving remains in the country in which the saving is done. The analysis is applied with realistic parameter values for U.S. outbound foreign direct investment. The calculations imply that an increase in outbound FDI raises the present value of U.S. national income by a rather substantial amount. Traditional analyses that conclude that the foreign tax credit causes excess outbound FDI fail to take into account the fact that firms that invest abroad increase their use of foreign debt as they increase the extent of their FDI.

Suggested Citation

  • Martin Feldstein, 1994. "Taxes, Leverage and the National Return on Outbound Foreign Direct Investment," NBER Working Papers 4689, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4689
    Note: PE

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    References listed on IDEAS

    1. Martin S. Feldstein, 1995. "The Effects of Outbound Foreign Direct Investment on the Domestic Capital Stock," NBER Chapters,in: The Effects of Taxation on Multinational Corporations, pages 43-66 National Bureau of Economic Research, Inc.
    2. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1, January.
    3. Feldstein, Martin & Dicks-Mireaux, Louis & Poterba, James, 1983. "The effective tax rate and the pretax rate of return," Journal of Public Economics, Elsevier, vol. 21(2), pages 129-158, July.
    4. James R. Hines, Jr. & R. Glenn Hubbard, 1990. "Coming Home To America: Dividend Repatriations By U.S. Multinationals," NBER Chapters,in: Taxation in the Global Economy, pages 161-208 National Bureau of Economic Research, Inc.
    5. Gordon, Roger H. & Hines, James Jr, 2002. "International taxation," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 28, pages 1935-1995 Elsevier.
    6. John Dutton, 1982. "The Optimal Taxation of International Investment Income: A Comment," The Quarterly Journal of Economics, Oxford University Press, vol. 97(2), pages 373-380.
    7. Sinn, H.W., 1990. "Taxation And The Birth Of Foreign Subsidiaries," Papers 66, Princeton, Woodrow Wilson School - Discussion Paper.
    8. Hines, James R, Jr, 1996. "Altered States: Taxes and the Location of Foreign Direct Investment in America," American Economic Review, American Economic Association, vol. 86(5), pages 1076-1094, December.
    9. G. D. A. MacDougall, 1960. "THE BENEFITS and COSTS OF PRIVATE INVESTMENT FROM ABROAD: A THEORETICAL APPROACH," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 13-35, March.
    10. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    11. Horst, Thomas, 1977. "American Taxation of Multinational Firms," American Economic Review, American Economic Association, vol. 67(3), pages 376-389, June.
    12. Robert E. Lipsey, 1995. "Outward Direct Investment and the U.S. Economy," NBER Chapters,in: The Effects of Taxation on Multinational Corporations, pages 7-42 National Bureau of Economic Research, Inc.
    13. Martin Feldstein & David Hartman, 1979. "The Optimal Taxation of Foreign Source Investment Income," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 613-629.
    14. Hines, James Jr., 1994. "Credit and deferral as international investment incentives," Journal of Public Economics, Elsevier, vol. 55(2), pages 323-347, October.
    15. Murray C. Kemp, 1962. "Foreign Investment And The National Advantage," The Economic Record, The Economic Society of Australia, vol. 38(81), pages 56-62, March.
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    Cited by:

    1. Stephanie E. Curcuru & Charles P. Thomas, 2014. "The Return on U.S. Direct Investment at Home and Abroad," NBER Chapters,in: Measuring Wealth and Financial Intermediation and Their Links to the Real Economy, pages 205-230 National Bureau of Economic Research, Inc.
    2. Feldstein, Martin, 1995. "Fiscal policies, capital formation, and capitalism," European Economic Review, Elsevier, vol. 39(3-4), pages 399-420, April.
    3. Martin Feldstein, 1994. "Tax policy and international capital flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 130(4), pages 675-697, December.
    4. Curcuru, Stephanie E. & Thomas, Charles P. & Warnock, Francis E., 2013. "On returns differentials," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 1-25.
    5. Willie Lahari, 2010. "Permanent and Transitory Shocks among Pacific Island Economies - Prospects for a Pacific Islands Currency Union," Working Papers 1001, University of Otago, Department of Economics, revised Feb 2010.
    6. Gonzalo, Jesus & Ng, Serena, 2001. "A systematic framework for analyzing the dynamic effects of permanent and transitory shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 25(10), pages 1527-1546, October.
    7. John Howe, 1994. "Internationalisation, Trade and Foreign Direct Investment," RBA Annual Conference Volume,in: Philip Lowe & Jacqueline Dwyer (ed.), International Intergration of the Australian Economy Reserve Bank of Australia.
    8. Tomáš Evan, 2010. "Some Issues of Political Economics of Multinational Corporations," Acta Oeconomica Pragensia, University of Economics, Prague, vol. 2010(4), pages 32-43.

    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods


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