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

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  • Martin Feldstein

Abstract

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
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    References listed on IDEAS

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    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.
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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. 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.
    3. 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.
    4. 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.
    5. John Howe, 1994. "Internationalisation, Trade and Foreign Direct Investment," RBA Annual Conference Volume (Discontinued), in: Philip Lowe & Jacqueline Dwyer (ed.),International Intergration of the Australian Economy, Reserve Bank of Australia.
    6. 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.
    7. Feldstein, Martin, 1995. "Fiscal policies, capital formation, and capitalism," European Economic Review, Elsevier, vol. 39(3-4), pages 399-420, April.
    8. 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.
    9. Martin Feldstein, 2000. "Global economic integration : opportunities and challenges : overview," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 297-309.
    10. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
    11. Tomáš Evan, 2010. "Some Issues of Political Economics of Multinational Corporations [Některé otázky politické ekonomie nadnárodních společností]," Acta Oeconomica Pragensia, Prague University of Economics and Business, vol. 2010(4), pages 32-43.

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    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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