Working Paper: NBER ID: w10337
Authors: Mihir A. Desai; C. Fritz Foley; James R. Hines Jr.
Abstract: Affiliate-level evidence indicates that American multinational firms circumvent capital controls by adjusting their reported intrafirm trade, affiliate profitability, and dividend repatriations. As a result, the reported profit impact of local capital controls is comparable to the effect of 24 percent higher corporate tax rates, and affiliates located in countries imposing capital controls are 9.8 percent more likely than other affiliates to remit dividends to parent companies. Multinational affiliates located in countries with capital controls face 5.4 percent higher interest rates on local borrowing than do affiliates of the same parent borrowing locally in countries without capital controls. Together, the costliness of avoidance and higher interest rates raise the cost of capital, significantly reducing the level of foreign direct investment. American affiliates are 13-16 percent smaller in countries with capital controls than they are in comparable countries without capital controls. These effects are reversed when countries liberalize their capital account restrictions.
Keywords: No keywords provided
JEL Codes: F21; F23; G15; H87; G18; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liberalization of capital account restrictions (F32) | reversal of effects on multinational investment behavior (F23) |
| capital controls (F38) | local borrowing rates (H74) |
| capital controls (F38) | reported trade patterns and profitability (F10) |
| capital controls (F38) | size of foreign direct investment (F21) |