Working Paper: CEPR ID: DP6299
Authors: Assaf Razin; Efraim Sadka
Abstract: We study the role of productivity and corporate taxation as driving forces of FDI among OECD countries in the presence of threshold barriers, which generate two margins for FDI decisions. Some simulations, based on the estimation results, suggest that there are marked differences in the sensitivity of FDI flows from the U.S. to productivity and taxes in OECD countries. Data on FDI flows are drawn from the International Direct Investment dataset (Source OECD), covering the bilateral FDI flows among 18 OECD countries over the period 1987 to 2003.The sensitivity of these flows to productivity in the U.K. is positive and high, relative to other EU countries and Japan. Similarly, the sensitivity of these flows to taxes in the U.K is negative and high, relative to other EU countries and Japan.
Keywords: corporate taxation; foreign direct investment; productivity; selection; flow equations
JEL Codes: F2; F3; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| host country productivity (O57) | intensive margin of FDI flows (F20) |
| host country productivity (O57) | extensive margin of FDI flows (F21) |
| source country productivity (O57) | extensive margin of FDI flows (F21) |
| host country tax rates (F38) | FDI flows (F21) |
| source country tax rates (H87) | likelihood of investment decisions (G11) |