Who Cares About Corporate Taxation? Asymmetric Tax Effects on Outbound FDI

This paper investigates whether different types of FDI are asymmetrically affected by corporate taxation. We classify investment projects according to several characteristics such as the general motivation for FDI, the type of business activity, or the degree of internationalisation of the multinational firm. Subsequently, we analyse how local taxes influence the number of German outbound investments in European countries. The analysis reveals significant asymmetries with regard to tax effects: vertically integrated investments are more sensitive to host‐country taxation than horizontal FDI; larger tax rate elasticities are estimated if business activities are considered highly mobile; and in accordance with profit‐shifting considerations, subsidiaries of more internationalised companies are less tax responsive to host‐country taxation.     

In search of spatial interdependence of US outbound FDI in the MENA region

The paper investigates the spatial interdependence of US MNE investments in the MENA region. Given the variations in resource endowments, governance structures and degree of infrastructure availability in MENA countries, one would expect these variables to affect an MNE 's choice of FDI location. We do find that domestic non‐spatial factors such as own country inflation and governance measured by bureaucratic quality as well as infrastructure affect a host country's inward FDI . We also found that only one measure of natural resource endowment; that is, oil and gas exports were instrumental in attracting FDI . This non‐spatial result is generally robust and invariant to the two methodologies employed in this study, that is the spatially autoregressive (SAR ) model and the spatial Durbin model (SDM ). We found that neighbouring countries’ infrastructure availability measured either by “electricity used” or “energy used” affected FDI inflows in a host country. However, this spatial impact was found only in the SDM model. The spatial effects of neighbouring countries’ economic and political conditions and resource endowments were, however, not observed on a host country's inward FDI . The insignificance of both the surrounding market potential and the spatially weighted FDI suggests a purely horizontal motive of MNE investments in the MENA region.     

Modeling FDI based on a spatially augmented gravity model: Evidence for Central and Eastern European Countries

Based on a spatially augmented gravity model, the current paper isolates spatial interrelationships in foreign direct investment (FDI) to Central and Eastern European Countries (CEECs) not only across the destination but also across the origin country dimension of FDI. Results show that (i) spatial interrelationships across destination countries are present and are consistent with the predominance of vertical-complex FDI in total FDI; (ii) spatial correlation across origin countries is given in earlier years of transition, while spillover and competition effects cancel over the whole sample period; and (iii) agglomeration forces gain in importance for FDI to CEECs.     

Who benefits from partial tax coordination?

In this paper, we investigate whether partial tax coordination is beneficial to countries within and outside a tax union, in which countries are supposed to compete in taxes and infrastructure. Our results demonstrate that a subgroup of countries agreeing on a common tax rate can harm both member and nonmember states. This is in contrast to the classical findings that partial tax harmonisation is Pareto improving. When a minimum tax rate is imposed within a tax union, we demonstrate that it does not necessarily improve the welfare of the member countries. Moreover, both the high‐tax and low‐tax countries can be worse off. This conclusion is at odds with the classical result that a high‐tax country benefits from the imposition of a lower tax bound.     

Foreign Direct Investment Policy–Friendly Business Environment in R&D Sectors: Baltic States versus Visegrad Countries

This article examines the impact of foreign direct investment (FDI) policy on inward FDI in the Visegrad and Baltic countries. The analysis of business environment highlights that the countries in both regions attempt to create a friendly business environment by means of similar methods. However, the countries in both regions focus on fiscal incentives such as taxes, which do not play a major role in attracting inward FDI in R&D. The results of attracting FDI are better in the Visegrad countries, which implement financial incentives toward inward FDI along with fiscal incentives. According to empirical analysis, it is noticed that a higher intervention level and a higher support level guarantee the volume of inward FDI. The country's introduced FDI policy enables it to orient industry and to implement economic strategic targets. FDI policy does have an impact on promoting the development of the entire country.     

税收饶让抵免对涉外投资影响效应的实证研究

为研究双边税收协定中饶让抵免条款对我国涉外投资的影响效应,运用2003~2010年37个国家的宏观面板数据,通过一个简单的实证分析模型分别检验了外国予以我国的税收饶让对外国对华直接投资（FDI）的影响以及我国予以外国的税收饶让对我国对外直接投资（ODI）的影响。结果表明,税收饶让明显刺激了外国直接投资流量,但并未发现税收饶让对我国对外直接投资具有显著的促进作用。据此,建议在进行双边税收谈判与协定签订时,既要争取外国对我国的饶让抵免优惠,也要积极给予对外投资战略合作国家以税收饶让,从而充分利用国际税收协定,促进国内战略资本的优化布局,实现＂引进来＂与＂走出去＂的双向协调。     

Governance and Globalisation

Unlike the large literature on ‘democracy and trade’, there is a much smaller literature on the effect of the level of democracy in a nation on the level of its foreign direct investment (FDI) inflow. These few studies reveal mixed empirical results, and surprisingly only one study has examined bilateral FDI flows. Moreover, few of these studies use multiple governance indicators separating the ‘pluralism’ effect of democratic institutions from the ‘good governance’ effect, there are no studies on democratic institutions’ various effects on the level of FDI relative to trade, and there are no studies of democratic institutions’ various effects on the selection of countries into FDI. We focus on three contributions. First, we examine the simultaneous effects of the World Bank's (six) Worldwide Governance Indicators (WGIs) – which allow separating the effects of pluralism from those of five other good governance measures – on bilateral trade, FDI and FDI relative to trade using state‐of‐the‐art gravity specifications. Second, we find strong evidence that – after accounting for host governments’ effectiveness in various roles of good governance – a higher level of pluralism as measured by the WGIs’ Voice and Accountability Index reduces trade levels, likely by increasing the ‘voice’ of more protectionist less‐skilled workers, but not FDI levels. Moreover, we find qualitatively different effects of other WGIs – such as political stability – on trade versus FDI flows. Third, we account for firm heterogeneity alongside a large number of zeros in bilateral FDI flows using recent advances in gravity modelling. We distinguish between the (country) intensive and extensive margins and show that pluralism affects FDI inflows negatively at the intensive margin, but positively at the extensive margin.     

Effects of aid for trade on extensive and intensive margins of greenfield FDI

Using a panel dataset of 105 developing countries for the period 2003–15, this paper assesses the effects of Aid for Trade (AfT) on greenfield FDI flows to the aid‐recipient countries. Particularly, this paper classifies the total dollar value of greenfield FDI flows to each recipient country in terms of four different layers: the extensive and intensive margins of projects as well as the extensive and intensive margins of source countries. Applying the system GMM estimator, this paper finds that AfT not only increases the dollar value of FDI flows to the recipient countries but also helps diversify the greenfield projects and source countries. In addition, this paper finds that AfT has a greater effect for greenfield FDI from donor (developed) countries than from non‐donor (developing) countries. Among the three components of AfT, aid for trade‐related infrastructure and aid for trade policy regulations are found to have positive links with greenfield FDI, irrespective of source‐country groups, yet their effects are larger for developed source countries. In contrast, aid for building productive capacity hinders greenfield FDI flows from non‐donor countries, while it promotes greenfield FDI from donor countries. We offer some explanations for this finding.     

Regional Taxation and Retailing: The Economic Geography of the Internet

It is well established in the economics literature that before-tax prices are not independent of sales-tax rates. This paper shows that a sales-tax imposed in a high tax region can decrease the tax-included price for a buyer in a low tax region who purchases from a seller in the high tax region. Therefore, it may be more profitable for Internet retailers to be located in high tax regions. An empirical analysis shows that automobile manufacturers in the European Union (EU) set higher before-tax recommended prices for countries with low indirect taxes. This may contribute to the explanation of the flow of Internet automobile sales from high tax countries to low tax countries in the EU.     

To What Extent Can Foreign Direct Investment Help Achieve International Development Goals?

For FDI to help alleviate absolute poverty and stimulate economic growth in developing countries, two conditions have to be met. First, developing countries need to be attractive to foreign investors. Second, the host‐country environment in which foreign investors operate must be conducive to favourable FDI effects with regard to overall investment, economic spillovers and income growth. This paper argues that it is more difficult to benefit from FDI than to attract FDI. The widely perceived concentration of FDI in few developing countries tends to obscure that, in relative terms, various small and poor countries are fairly attractive to FDI. Yet, the mobilisation of domestic resources remains by far, more important than attracting FDI for financing investment and stimulating economic growth. Furthermore, high inward FDI is no guarantee for poverty alleviation and positive growth effects. In particular, the empirical evidence suggests that host‐country conditions typically prevailing in poor countries, including weak institutions and an insufficient endowment of complementary factors of production, constrain the growth‐enhancing and poverty‐alleviating effects of FDI. The crux is that creating an environment in which FDI may deliver social returns will take considerable time exactly where development needs are most pressing.     

外国直接投资对我国税收正负影响的实证分析

本文实证分析了外国直接投资对我国税收的正负影响.结论认为,虽然外国直接投资极大地促进了我国税收的增长,但给予外资较高程度的税收优惠也在一定程度上侵蚀了我国的税基,减少了我国的税收收入.由于税收优惠并非吸引外资的显著因素,有必要分步骤地进行现有税收制度改革,最终统一内外资企业的税收制度.     

On the Causal Links Between FDI and Growth in Developing Countries

We analyse the Granger causal relationships between foreign direct investment (FDI) and GDP in a sample of 31 developing countries covering 31 years. Using estimators for heterogeneous panel data we find bi‐directional causality between the FDI‐to‐GDP ratio and the level of GDP. FDI has a lasting impact on GDP, while GDP has no long‐run impact on the FDI‐to‐GDP ratio. In that sense FDI causes growth. Furthermore, in a model for GDP and FDI as a fraction of gross capital formation (GCF) we also find long‐run effects from FDI to GDP. This finding may be interpreted as evidence in favour of the hypotheses that FDI has an impact on GDP via knowledge transfers and adoption of new technology.     

Why do countries combine the exemption system for the taxation of foreign profits with domestic double taxation relief?

Many European countries exempt foreign profits from domestic corporate taxation. At the shareholder level, however, all corporate profits are taxed, and double taxation relief is granted only for domestic corporate taxes. This paper attempts to rationalize this tax policy. In the presence of double taxation agreements which exempt foreign profits from domestic corporate taxation, countries may use shareholder taxes to tax these profits. The disadvantage of shareholder taxes is that they create incentives to sell domestic firms to foreigners. But double taxation relief for domestic profits may preserve domestic ownership. Our results imply that national dividend tax policies may be a factor contributing to the empirically observed home bias in investment.     

Foreign Direct Investment in Africa: The Role of Natural Resources,Market Size,Government Policy,Institutions and Political Instability

Data from several investor surveys suggest that macroeconomic instability, investment restrictions, corruption and political instability have a negative impact on foreign direct investment (FDI) to Africa. However, the relationship between FDI and these country characteristics has not been studied. This paper uses panel data for 22 countries over the period 1984–2000 to examine the impact of natural resources, market size, government policies, political instability and the quality of the host country's institutions on FDI. It also analyses the importance of natural resources and market size vis‐à‐vis government policy and the host country's institutions in directing FDI flows. The main result is that natural resources and large markets promote FDI. However, lower inflation, good infrastructure, an educated population, openness to FDI, less corruption, political stability and a reliable legal system have a similar effect. A benchmark specification shows that a decline in the corruption from the level of Nigeria to that of South Africa has the same positive effect on FDI as increasing the share of fuels and minerals in total exports by about 35 per cent. These results suggest that countries that are small or lack natural resources can attract FDI by improving their institutions and policy environment.     

Determinants of Bilateral Trade Flows in OECD Countries: Evidence from Gravity Panel Data Models

This paper aims to identify the main causes of bilateral trade flows in OECD countries. The specific features of the study include the explicit introduction of R&D and FDI as the two important explanatory variables, conduct of unit root tests in the panel data framework and careful consideration of endogeneity. The main findings are that the levels and similarities of market size, domestic R&D stock and inward FDI stock are positively related to bilateral trade, while the distance, measured by both geographical distance and relative factor endowment, between trade partner countries has a negative impact. These findings lend support to new trade, FDI and new growth theories.     

Modes of Foreign Direct Investment and Patterns of Trade: An Alternative Empirical Approach

Modes of FDI can be clarified by analysing the changing patterns of trade among host, home and third countries. However, most empirical experiments of foreign direct investment (FDI) determinants have been confined to general characteristics of host countries and multinational enterprises' outward investment activities. This may not clearly characterise the specific characteristics of inward FDI in regard to the host country. Thus, we introduce an alternative approach to clarify modes of FDI by investigating the link between patterns of trade and inward FDI. To empirically test whether our approach is applicable, we choose China during the period 1998–2007. We construct a modified gravity equation of bilateral trade while considering spatially lagged interdependence between host, home and third countries. The problem of endogeneity is controlled by applying the system generalised method of moments (GMM) estimation technique. Our findings are consistent with results in existing studies on modes of outward FDI to China and prove that our approach in dealing with the link between patterns of trade and inward FDI has wide applicability to all modes of FDI. We discover there is strong evidence for statistically significant complementarity between bilateral trade and inward FDI within the aggregate trade data. As we decompose the aggregate trade data into final and intermediate goods, we find the motivation concerning export‐platform and complex vertical FDI is very significant. In addition, as we separate the bilateral partners into developing partners and developed partners, we find both bilateral and multilateral linkages are much stronger with developing partners.     

Heterogeneous immigrants,exports and foreign direct investment: The role of language skills

We investigate the interplay of language skills and immigrant stocks in determining bilateral FDI outstocks of OECD reporting countries. Applying a Poisson panel estimator to 2004–11 data, we find robust evidence for a positive effect of bilateral immigrants on bilateral FDI‐provided that residents of the two countries have few language skills in common. We find a similar effect for immigrants from third countries that speak the language(s) of the FDI host country, making them potential substitutes for bilateral migrants. Our findings suggest that immigrants facilitate outgoing FDI through their language skills, rather than through other characteristics like cultural familiarity.     

The Role of Geography in Financial and Economic Integration: A Comparative Analysis of Foreign Direct Investment,Trade and Portfolio Investment Flows

The objective of this paper is to examine the role of geography in explaining the patterns of financial and economic integration among both developed and developing countries. Using a gravity model, we compare North‐North, North‐South and South‐North FDI, trade and portfolio investment flows to examine how geographical factors influence these bilateral flows. The results indicate that the impact of geography variables on FDI and portfolio are similar to their effect on trade. Geography variables have a statistically significant effect both on FDI and portfolio investment, but FDI is more sensitive to distance. We interpret the negative effect of distance as the existence of information costs in financial flows. Also bilateral FDI, trade and portfolio investment flows react to macroeconomic fundamentals in the same way, however, with different degrees of sensitivity. There are significant differences between North‐North and North‐South flows. Our results find support for the argument that most FDI among industrial countries are horizontal, whereas most FDI investment in developing countries is vertical. The fact that the significance of geographical variables on financial flows still remained even after controlling for the macroeconomic fundamentals, is in contrast with the standard capital market model. The results can, however, be reconciled if geographical factors can proxy for information costs, which may in turn explain why country portfolios are still home‐biased. The significant effect of distance on financial flows may also explain how idiosyn cratic shocks are spread (i.e. contagion) to other countries in the same region. Ultimately, the geographical location of a country may determine its economic and financial integration into the world economy.     

Tax Morale and International Tax Evasion

Low tax morale is associated with domestic tax evasion. We find evidence of cross-border equity flows designed to evade taxes in low tax morale countries. Using Foreign Portfolio Equity Investment (FPI) flows into 21 OECD countries from 138 source countries and an index of tax morale from the World Value Survey (WVS), we show that individuals in countries with low tax morale engage in tax evasion via roundtripping through tax havens. This allows them to benefit from differential taxes applied to foreign investors vis-a-vis domestic investors. Our results remain robust to various measures of tax morale and distinct subsamples.     

The Determinants of EU Processing Trade

This paper assesses the determinants of European outward and inward processing trade. Thereby, it distinguishes between size, relative factor endowment, (other) cost factors and infrastructure variables. Using a large panel of bilateral processing trade flows of the EU12 countries at the aggregate level over the period 1988–1999, we find that infrastructure variables, relative factor endowments and other cost variables are important determinants for the EU's outward processing trade. Costs also play a key role for the EU's inward processing trade.