Age‐related Optimal Income Taxation*

In most countries, average income varies with age. In this paper we investigate if and how it is possible to enhance the redistributive mechanism by relating tax payments to age. Using an OLG model where some individuals are low skilled all their life while others are low skilled when young but high skilled when old, we first show how an age dependent optimal income tax can Pareto improve upon an age independent income tax. We then characterize the optimal age dependent income tax. A tax on interest income is part of the optimal tax structure.     

US Foreign Direct Investment in East Asia: Strategy and Policy Issues

East Asian trade and investment policies have attracted US investment into the region, but these policies should be fine-tuned for the region to compete effectively for US investment inflow and increase their global share of US foreign direct investment. The changes should consider the needs of the US investors and East Asia's own economic development. Bilateral free trade agreements with the US are the likely channel for these changes, but the question is whether East Asia is ready for a comprehensive and deep liberalization. East Asia should work toward a regional investment policy framework to facilitate and expand the regional production network developed by the US foreign direct investment.     

Overseas Impacts of China's Outward Direct Investment

China's outward direct investment (ODI) has grown rapidly since 2004. But along with such phenomenal growth is a mixed feeling toward Chinese investments in host countries. This article explores some overseas impacts of Chinese ODI based on an analysis of China's policy environment and investment patterns. We argue that what Chinese investors bring to host economies includes (i) massive job creation, but limited technology transfers to the local economy; (ii) ample capital as well as entry into the Chinese market; and (iii) damage from corporate social misbehavior. However, we suspect that these overseas impacts may be transitory as three dynamics, increased conflicts, accelerated learning and China's domestic structural changes, are simultaneously set in motion.     

Asymmetric Demand Information and Foreign Direct Investment*

We examine the FDI versus exports decision of firms competing in an oligopolistic (quantity‐setting) market under demand uncertainty and asymmetric information. Compared to a firm that chooses to export, a firm that chooses to set up a plant in the host market has superior information about local market demand. In addition to the well‐known tension between the fixed set‐up costs of investment, the additional variable costs of exports and oligopoly sizes, the incentive to invest abroad is explained by the strategic learning effect. FDI may be observed even if trade costs are zero. The analysis is robust to price competition and to the possibility that a foreign firm can engage in both FDI and exports.     

Foreign Direct Investment and Environmental Taxes

Abstract. This paper studies the effect of foreign direct investment (FDI) on environmental policy stringency in a two-country model with trade costs, where FDI could be unilateral and bilateral and both governments address local pollution through environmental taxes. We show that FDI does not give rise to ecological dumping because the host country has an incentive to shift rents away from the source country toward the host country. Environmental policy strategies and welfare effects are studied under the assumption that parameter values support FDI to be profitable.     

Foreign Direct Investment and the Incentives to Innovate and Imitate*

We propose a new channel of FDI spillovers on domestic firms, which operates through imitation of original products. Domestic heterogeneous firms may not introduce any new products, introduce a new product line (innovate), or develop a variety that is a close substitute to an existing product line (imitate). The presence of foreign firms generates incentives for imitation because they introduce original products that are vertically differentiated from domestic products. Using firm‐level panel data for China, we find that increased FDI presence in a given industry leads to more imitation, but not necessarily more innovation, by domestic firms.     

Fertility,Taxation and Family Policy*

Historically, there is clear evidence of an inverse relationship between female labour supply and fertility. However, the relationship across countries is now positive. Countries like Germany and Italy, with the lowest fertility, also have the lowest female participation rates. This paper analyses the extent to which this can be explained by public policy, in particular taxation and the system of child support. The results suggest that countries which have individual rather than joint taxation, and which support families through child care facilities rather than child payments, are likely to have both higher female labour supply and higher fertility.     

The effect of working time and labor force participation on unemployment: A new argument in an old debate

This paper introduces a new argument into the theoretical literature on labor market effects of changes in working hours and labor force participation. We advance a general equilibrium model in which increased labor supply reduces unskilled unemployment via consumer demand: longer work hours and higher labor force participation imply higher incomes and less (leisure) time. In consequence, home production is reduced in favor of outsourcing domestic tasks to the market, shifting consumer demand toward unskill-intensive goods. Relative demand for unskilled labor rises and unemployment falls.     

Foreign Direct Investment and the Unionization Rate

Technological innovations improve the welfare of a country facing fixed terms of trade, but may lead to immiserization when the terms of terms of trade are adversely affected. This paper establishes that transport innovation can be immiserizing for a small country when the transport sector exhibits variable returns to scale. The release of resources from the transport sector triggers Rybczynski-like effects, and the resulting expansion (contraction) in the volume of trade and in the demand for transport services raises unit costs of these services, and may reduce welfare in the presence of decreasing (increasing) returns to scale. [411]     

How important is employment protection legislation for Foreign Direct Investment flows in Central and Eastern European countries?1

In this article we investigate empirically the importance of labour market conditions and in particular the role of employment protection legislation as determinants of bilateral Foreign Direct Investment (FDI). We find that FDI flows are significantly higher in countries with relatively low unit labour costs. We also find that employment protection legislation does not exert a statistically significant impact on FDI flows. Our results are consistent with the interpretation that transition economies attract FDI via low production costs whereas indirect costs related to the rigidity of the labour market are less relevant.     

Revenue Sharing and Information Exchange under Non‐discriminatory Taxation*

The international exchange of tax information, and its merits compared to withholding taxation, has emerged as a central topic in international tax policy. We characterize and compare the outcomes that emerge, in a two‐country world, with and without information exchange, under the assumption that countries are unable to tax residents and non‐residents differentially. The analysis focuses on the role of asymmetries in country size (capturing a key feature of tax havens) and on the impact and potential desirability of schemes to share the revenue raised by withholding (as under the new EU savings tax arrangements) or (more innovatively) as a consequence of information exchange. We show that, irrespective of any difference in country size, it is in the interests of both countries, in terms of tax revenue, that all revenue collected from non‐residents be transferred to the residence country—which would entail taking the EU practice even further from the norm, but is currently the standard in relation to information exchange. A withholding scheme with revenue fully reallocated in this way gives both countries more revenue than does information sharing, whatever the allocation under the latter.     

Foreign Acquisitions,Domestic Multinationals,and R&D

Our aim in this paper is to evaluate the causal effect of foreign acquisition on research and development (R&D) intensity in targeted domestic firms. We are able to distinguish domestic multinational enterprises (MNEs) and non‐MNEs, which allows us to investigate the fear that the change in ownership of domestic MNEs to foreign MNEs leads to a reduction in R&D activity in the country. Overall, our results give no support to the fears that foreign acquisition of domestic firms leads to a relocation of R&D activity in Swedish MNEs. Rather, in this paper, we find robust evidence that foreign acquisitions lead to increasing R&D intensity in acquired domestic MNEs and non‐MNEs.     

Externality‐Correcting Taxes and Regulation*

In much of the literature on externalities, taxes and direct regulation have been considered as alternative policy instruments. Both instruments might be imperfect in practice, reflecting informational deficiencies and other limitations. We analyse the use of taxes and regulation in combination, to control externalities arising from individual consumption behaviour. We consider the cases either where taxes are imperfectly differentiated to reflect individual differences in externalities, or where some consumption escapes taxation. In both cases, we characterize the optimal instrument mix, and we show how changing the level of direct regulation alters the optimal externality tax.     

Revisiting Exports and Foreign Direct Investment in Vietnam

Since 1986, Vietnam has undertaken various reform measures in the trade and foreign investment area. This paper finds significant contributions of world trade, and competitiveness and liberalization effects to Vietnam's export growth over the period 1997–2008. Vietnam's exports became more competitive and better complemented the import demand of Vietnam's trade partners. In addition, dynamic comparative advantage became evident in many products, but significant room remains for improving export competitiveness. Foreign direct investment (FDI) inflows also increased and helped stimulate Vietnam's exports. FDI inflows have increased in both the short‐ and long‐term, yet are only of a limited magnitude. This necessitates more effective measures to enhance the linkages between FDI and domestic enterprises.     

Foreign direct investment in services and manufacturing productivity: Evidence for Chile

This paper examines the impact of substantial foreign direct investment (FDI) inflows in producer service sectors on the total factor productivity (TFP) of Chilean manufacturing firms. Positive effects are obtained in firm fixed effects instrumental variables regressions and show that forward linkages from FDI in services explain 7% of the observed increase in Chile's manufacturing users' TFP. Our findings also suggest that service FDI fosters innovation activities in manufacturing. Moreover, we show that service FDI offers opportunities for laggard firms to catch up with industry leaders.     

Firm performance and labour turnover: Evidence from the 2004 workplace employee relations survey

We explore the impact of labour turnover on firm performance by analysing the predictions of an extension of the efficiency wage model of [Salop, S., (1979) ‘A Model of the Natural Rate of Unemployment’, American Economic Review, 69, 117–125.] developed by [Garino, G. and Martin, C., (2008) ‘The Impact of Labour Turnover: Theory and Evidence from UK Micro Data’, Quantitative and Qualitative Analysis in the Social Sciences, 1(3), 81–104.], which separates incumbent and newly hired workers in the production function. Within this theoretical framework, an exogenous increase in the turnover rate can increase profits if firms do not choose wages unilaterally. We test the theoretical predictions of the model using UK cross-section establishment-level data, the 2004 Workplace and Employee Relations Survey. In accordance with our theoretical priors, the empirical results support the standard inverse relationship between the quit rate and firm performance where firms unilaterally choose the wage and generally support a positive relationship between firm performance and the quit rate where trade unions influence wage setting.     

Conspicuous Leisure: Optimal Income Taxation When Both Relative Consumption and Relative Leisure Matter*

In previous studies on public policy under relative‐consumption concerns, leisure comparisons have been ignored. In this paper, we consider a two‐type optimal non‐linear income tax model, in which people care about both their relative consumption and their relative leisure. Increased consumption positionality typically implies higher marginal income tax rates for both ability types, whereas leisure positionality has an offsetting role. However, this offsetting role is not symmetric; concern about relative leisure implies a progressive income tax component (i.e., a component that is larger for the high‐ability type than for the low‐ability type). Leisure positionality does not modify the policy rule for public‐good provision.