Working Paper: NBER ID: w11196
Authors: Assaf Razin; Yona Rubinstein; Efraim Sadka
Abstract: The paper brings out the special mechanism through which taxes influence bilateral FDI, when investment decisions are two-fold in the presence of fixed setup flows costs. For each pair of source-host countries, there is a set of factors determining whether aggregate FDI flows will occur at all, and a different set of factors determimnig the volume of FDI flows (provided that they occur). We demonstrate that the notion that the mere international tax differetials are a key factor behind the direction and magnitude of FDI flows is too simple. We argue that the source country tax rate works primarely on the selection process, whereas the host-country tax rate affect mainly the magnitude of the FDI, once they occur. We analyze international panel data with 24 OECD countries over the period 1981-1998 by the Heckman selection method to bring evidence in support of this argument.
Keywords: corporate taxation; bilateral FDI; threshold barriers; Heckman selection method; OECD countries
JEL Codes: F3; H2; F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Source country tax rate (F38) | Likelihood of making a new FDI investment (F23) |
| Host country tax rate (H29) | Magnitude of FDI flows (F21) |
| Source country tax rate (F38) | FDI flows (F21) |
| Host country tax rate (H29) | FDI flows (F21) |