Working Paper: NBER ID: w3895
Authors: Alan J. Auerbach; Kevin Hassett
Abstract: Foreign direct investment in the United States boomed in the late 1980s. Some have attributed this rise to the Tax Reform Act of 1986, which by discouraging investment by domestic firms may have provided opportunities for foreign firms not as strongly affected by the U.S. tax changes. We challenge this view on theoretical and empirical grounds, finding that: (1) While the argument applies to new capital investment, the boom was primarily in mergers and acquisitions; (2) While the argument holds primarily for investment in equipment, there was no shift toward the acquisition of equipment-intensive firms, and (3) The FDI boom in the U.S. was really part of a worldwide FDI boom ? the U.S. share of outbound FDI from other countries did not increase during the period 1987-9.
Keywords: Foreign Direct Investment; Tax Reform; Mergers and Acquisitions
JEL Codes: F21; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax Reform Act of 1986 (H20) | FDI patterns (F23) |
| Tax Reform Act of 1986 (H20) | mergers and acquisitions (G34) |
| mergers and acquisitions (G34) | FDI boom (F23) |
| Tax Reform Act of 1986 (H20) | investment in equipment (G31) |
| investment in equipment (G31) | acquiring equipment-intensive firms (L63) |
| Tax Reform Act of 1986 (H20) | FDI (overall) (F23) |