Corporate Taxation and Bilateral FDI with Threshold Barriers

Assaf Razin, Yona Rubinstein and Efraim Sadka

No 11196, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The paper brings out the special mechanism through which taxes influence bilateral FDI, when investment decisions are two-fold in the presence of fixed setup flows costs. For each pair of source-host countries, there is a set of factors determining whether aggregate FDI flows will occur at all, and a different set of factors determimnig the volume of FDI flows (provided that they occur). We demonstrate that the notion that the mere international tax differetials are a key factor behind the direction and magnitude of FDI flows is too simple. We argue that the source country tax rate works primarely on the selection process, whereas the host-country tax rate affect mainly the magnitude of the FDI, once they occur. We analyze international panel data with 24 OECD countries over the period 1981-1998 by the Heckman selection method to bring evidence in support of this argument.

JEL-codes: F1 F3 H2 (search for similar items in EconPapers)
Date: 2005-03
New Economics Papers: this item is included in nep-acc and nep-pbe
Note: IFM ITI PE
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Citations: View citations in EconPapers (20)

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