Working Paper: NBER ID: w4703
Authors: Jason O. Cummins; R. Glenn Hubbard
Abstract: Understanding the determinants of foreign direct investment (FDI) is important for analyzing capital flows and the industrial organization of multinational firms. Most empirical studies of FDI, however, have focused on case studies of nontax factors in overseas investment decisions or on discerning reduced-form relationships between some measure of FDI and variables relating to nontax and tax aspects of the investment decision. In this paper, we examine the effects of taxation on FDI using previously unexplored (for this purpose) panel data on FDI by subsidiaries of U.S. multinational firms collected by Compustat's geographic segment file project. These firm- level data contain information on new capital investment overseas which enable us to measure tax influences on FDI more precisely and allow us to focus on structural models of subsidiaries' investment decision. Our empirical results cast significant doubt on the simplest notion that 'taxes don't matter' for U.S. firms' FDI decisions. Tax parameters influence FDI in precisely the way indicated by neoclassical models. Our results also lend support to the application of the 'tax capitalization' model to the study of dividend repatriation and foreign direct investment decisions.
Keywords: Foreign Direct Investment; Taxation; Multinational Firms
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 parameters (H20) | FDI decisions (F23) |
| higher after-tax rates of return (H29) | FDI (F23) |
| tax parameters (H20) | cost of capital (G31) |
| cost of capital (G31) | investment decisions (G11) |
| tax parameters (H20) | dividend repatriation decisions (G35) |