Tax effects on foreign direct investment-Just a rerouting
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View abstract on PubMed
Summary
This summary is machine-generated.Tax rates impact immediate foreign direct investment (FDI), not ultimate FDI. High tax rates encourage indirect FDI, suggesting taxes influence investment routes rather than location decisions.
Area Of Science
- Economics
- International Finance
- Taxation Policy
Background
- Foreign Direct Investment (FDI) is crucial for economic growth.
- Understanding the determinants of FDI, particularly tax influences, is vital for policymakers.
- Existing research often aggregates different FDI types, potentially masking specific tax effects.
Purpose Of The Study
- To investigate the tax-related determinants of indirect foreign direct investment (FDI).
- To differentiate the impact of tax policies on immediate versus indirect FDI flows.
- To analyze the role of bilateral tax rates, anti-tax avoidance rules, and tax haven status.
Main Methods
- Utilized the OECD Benchmark Definition of Foreign Direct Investment (BMD4) database.
- Employed the standard gravity equation model adapted for FDI analysis.
- Applied the Poisson pseudo-maximum likelihood estimation for robust empirical results.
Main Results
- Ultimate FDI is driven by real economic factors, unaffected by tax policies.
- Immediate FDI is significantly influenced by tax-related determinants.
- Higher bilateral effective average tax rates positively correlate with increased indirect FDI flows.
Conclusions
- Tax policies do not influence the ultimate location decisions of FDI.
- Taxation primarily affects the chosen investment channel (direct vs. indirect).
- Previous studies may have overestimated the overall tax elasticity of FDI due to aggregation.
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