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Firm outward direct investment and multinational activity under domestic taxes

Author

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  • Haichao Fan
  • Yu Liu
  • Suhua Tian
  • Xuan Wang
Abstract
We study the effect of domestic corporate tax on firms' outward direct investment (ODI) decisions. We exploit a tax unification reform in China that raises corporate income tax rates on foreign‐funded firms but reduces those on domestic Chinese firms. Using a difference‐in‐differences estimator that compares the ODI of foreign affiliates and joint ventures with private domestic firms before and after the reform, we find that a higher domestic corporate tax rate increased the ODI of foreign firms, particularly for joint ventures with Chinese majority shareholders. We show evidence that the increases in firm ODI reflect production relocation out of China.

Suggested Citation

  • Haichao Fan & Yu Liu & Suhua Tian & Xuan Wang, 2023. "Firm outward direct investment and multinational activity under domestic taxes," Economic Inquiry, Western Economic Association International, vol. 61(3), pages 605-628, July.
    • Handle: RePEc:bla:ecinqu:v:61:y:2023:i:3:p:605-628
    DOI: 10.1111/ecin.13142
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    References listed on IDEAS

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