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The Effects of Bilateral Tax Treaties on U.S. FDI Activity

  • Bruce A. Blonigen
  • Ronald B. Davies

The effects of bilateral tax treaties on FDI activity have been unexplored, despite significant ongoing activities by countries to negotiate and ratify these treaties. This paper estimates the impact of bilateral tax treaties using both U.S. inbound and outbound FDI over the period 1966-1992. Our estimates suggest a statistically significant average annual increase of FDI activity for each additional year of a treaty which ranges from 2% to 8%, depending on the FDI activity measure and empirical framework we employ. Examination for nonlinear effects of treaty age on FDI activity suggests that while treaties have an immediate impact on FDI flows, there is a substantial lag before treaty adoption positively affects FDI stocks and affiliate sales. Finally, our results suggest that bilateral tax treaties have an effect on investment outside of the withholding tax rates they alter, which may include the commitment and risk reduction effects of these treaties.

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File URL: http://www.nber.org/papers/w7929.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7929.

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Date of creation: Oct 2000
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Publication status: published as Blonigen, Bruce A. and Ronald B. Davies. "The Effects Of Bilateral Tax Treaties On U.S. FDI Activity," International Tax and Public Finance, 2004, v11(5,Sep), 601-622.
Handle: RePEc:nbr:nberwo:7929
Note: ITI PE
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  1. Rosanne Altshuler, 1995. "Do Repatriation Taxes Matter? Evidence from the Tax Returns of U.S. Multinationals," NBER Chapters, in: The Effects of Taxation on Multinational Corporations, pages 253-276 National Bureau of Economic Research, Inc.
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  7. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, vol. 87(4), pages 520-44, September.
  8. Janeba, Eckhard, 1996. "Foreign direct investment under oligopoly: Profit shifting or profit capturing?," Journal of Public Economics, Elsevier, vol. 60(3), pages 423-445, June.
  9. James R. Markusen & Keith E. Maskus, 2001. "Multinational Firms: Reconciling Theory and Evidence," NBER Chapters, in: Topics in Empirical International Economics: A Festschrift in Honor of Robert E. Lipsey, pages 71-98 National Bureau of Economic Research, Inc.
  10. John Mutti & Harry Grubert, 1996. "The Significance of International Tax Rules for Sourcing Income: The Relationship Between Income Taxes and Trade Taxes," NBER Working Papers 5526, National Bureau of Economic Research, Inc.
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