Skip to main content
SpringerLink
Log in

Taxation and Foreign Direct Investment: A Synthesis of Empirical Research

  • Published:
International Tax and Public Finance Aims and scope Submit manuscript

Abstract

This paper reviews the empirical literature on the impact of company taxes on the allocation of foreign direct investment. We compare the outcomes of 25 empirical studies by computing the tax rate elasticity under a uniform definition. The median value of the tax rate elasticity in the literature is around −3.3 (i.e. a 1%-point reduction in the host-country tax rate raises foreign direct investment in that country by 3.3%). There exists substantial variation across studies, however. By performing a meta-analysis, the paper aims to explain this variation by the differences in characteristics of the underlying studies. Systematic differences between studies are found with respect to the type of foreign capital data used, and the type of tax rates adopted. We find no systematic differences in the responsiveness of investors from tax credit countries and tax exemption countries.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Altshuler, R., H. Grubert and T. S. Newlon. (2001) “Has US Investment Abroad become more Sensitive to Tax Rates?” In James R. Hines, Jr. (ed.), International Taxation and Multinational Activity. Chicago, IL: University of Chicago Press.

    Google Scholar 

  • Altshuler, R. and T. S. Newlon. (1993). “The effects of U.S. Tax Policy on the Income Repatriation Patterns of U.S. Multinational Corporations,” In A. Giovannini, R. G. Hubbard and J. Slemrod, (eds.), Studies in International Taxation. University of Chicago Press.

  • Auerbach, A. J. and K. Hassett. (1993). “Taxation and Foreign Direct Investment in the United States: A Reconsideration of the Evidence.” In A. Giovannini, R. G. Hubbard and J. Slemrod (eds.), Studies in International Taxation. Chicago University Press.

  • Auerbach, A. J. and J. R. Hines, Jr. (1988). “Investment Tax Incentives and Frequent Tax Reforms,” American Economic Review 78, 211–216.

    Google Scholar 

  • Bartik, T. J. (1985). “Business Location Decisions in the United States: Estimates of the Effects of Unionization, Taxes and other Characteristics of States,” Journal of Business and Economic Statistics 3, 14–22.

    Google Scholar 

  • Benassy-Quere, A., L. Fontagne and A. Lahreche-Revil. (2001). “Tax Competition and Foreign Direct Investment,” Mimeo, CEPII, Paris.

    Google Scholar 

  • Bijmolt, T. H. A. and R. G. M. Pieters. (2001) “Meta-Analysis in Marketing When Studies Contain Multiple Measurements,” Marketing Letters 12, 157–169.

    Google Scholar 

  • Billington, N. (1999). “The Location of Foreign Direct Investment: An Empirical Analysis,” Applied Economics31, 65–76.

    Google Scholar 

  • Boskin, M. J. and W. G. Gale. (1987). “New Results on the Effects of Tax Policy on the International Location of Investment.” In M. Feldstein (ed.), The Effects of Taxation on Capital Accumulation.Chicago, IL and London: University of Chicago Press.

    Google Scholar 

  • Broekman, P. and P. van Vliet. (2000). “De gevoeligheid van FDI voor de Effective Tax Rate,” Erasmus Advies Project, Erasmus University Rotterdam.

    Google Scholar 

  • Cassou, S. P. (1997). “The Link between Tax Rates and Foreign Direct Investment,” Applied Economics 29, 1295–1301.

    Google Scholar 

  • Commission of the European Communities (CEC). (1992). “Report of the Committee of Independent Experts on Company Taxation. (Ruding Report).” Brussels, March.

  • Commission of the European Communities (CEC). (2001). “Company Taxation in the Internal Market,” COM(2001)582, Brussels.

  • Devereux, M. P. and H. Freeman. (1995). “The Impact of Tax on Foreign Direct Investment: Empirical Evidence and the Implications for Tax Integration Schemes,” International Tax and Public Finance 2, 85–106.

    Google Scholar 

  • Devereux, M. P. and R. Griffith. (1998a). “The Taxation of Discrete Investment Choices,” IFS Working Paper 98/16.

  • Devereux, M. P. and R. Griffith. (1998b). “Taxes and the Location of Production: Evidence from a Panel of US Multinationals,” Journal of Public Economics 68, 335–367.

    Google Scholar 

  • Devereux, M. P. and M. Pearson. (1995). “European Tax Harmonisation and Production Efficiency,” European Economic Review 39, 1657–1681.

    Google Scholar 

  • Dunning, J. H. (1981) International Production and the Multinational Enterprise, London: Allen & Unwin.

    Google Scholar 

  • Florax, R. J. G. M. (2001). “Methodological Pitfalls in Meta-Analysis: Publication Bias,” VU Research Memorandum 2001–28, Amsterdam.

  • Gorter, J. and R. A. de Mooij. (2001). Capital Income Taxation in the European Union: Trends and Trade-Offs. The Hague: Sdu Publishers.

    Google Scholar 

  • Gorter, J. and A. Parikh. (2000). “How Mobile is Capital in the European Union?” CPB Research Memorandum no. 172, The Hague.

  • Grubert, H. and J. Mutti. (1991). “Taxes, Tariffs and Transfer Pricing in Multinational Corporation Decision Making,” Review of Economics and Statistics 73, 285–293.

    Google Scholar 

  • Grubert, H. and J. Mutti. (2000). “Do Taxes Influence where US Corporations Invest?” National Tax Journal 53, 825–839.

    Google Scholar 

  • Hartman, D. G. (1984). “Tax Policy and Foreign Direct Investment in the United States,” National Tax Journal37, 475–488.

    Google Scholar 

  • Hartman, D. G. (1985). “Tax Policy and Foreign Direct Investment,” Journal of Public Economics 26, 107–121.

    Google Scholar 

  • Hines, J. R., Jr. (1996). “Altered States: Taxes and the Location of Foreign Direct Investment in America,” American Economic Review 86, 1076–1094.

    Google Scholar 

  • Hines, J. R., Jr. (1997). “Tax Policy and the Activities of Mmultinational Corporations.” In A. J. Auerbach (ed.), Fiscal Policy: Lessons from Economic Research. Cambridge MA: MIT Press.

    Google Scholar 

  • Hines, J. R., Jr. (1999). “Lessons from Behavioural Responses to International Taxation,” National Tax Journal54, 305–323.

    Google Scholar 

  • Hines, J. R., Jr. and E. M. Rice. (1994). “Fiscal Paradise: Foreign Tax Havens and American Business,” Quarterly Journal of Economics 109, 149–182.

    Google Scholar 

  • Jun, J. (1994). “How Taxation Affects Foreign Direct Investment (Country-Specific Evidence),” Policy Research Working Paper 1307, World Bank, Washington D.C.

    Google Scholar 

  • Murthy, N. R. V. (1989). “The Effects of Taxes and Rates of Return on Foreign Direct Investment in the United States: Some Econometric Comments,” National Tax Journal 42, 205–207.

    Google Scholar 

  • Newlon, T. S. (1987). “Tax Policy and Multinational Firms' Financial Policy and Investment Decisions,” Ph.D. dissertation, Princeton University.

  • Mooij de, R. A. and S. Ederveen. (2001). “Taxation and Foreign Direct Investment: A Synthesis of Empirical Research,” CPB Discussion Paper no. 3, CPB, The Hagul.

    Google Scholar 

  • OECD. (2000). Recent Trends in Foreign Direct Investment. Paris.

  • Pain, N. and G. Young. (1996). “Tax Competition and the Pattern of European Foreign Direct Investment,”Mimeo National Institute of Economic and Social Research.

  • Papke, L. E. (1991). “Interstate Business Tax Differentials and New Firm Location: Evidence from Panel Data,” Journal of Public Economics 45, 47–68.

    Google Scholar 

  • Scholes, M. S. and M. A. Wolfson. (1990). “The Effects of Changes in Tax Law on Corporate Reorganization Activity,” Journal of Business 63, S141–S164.

    Google Scholar 

  • Shang-Jin, W. (1997). “How Taxing is Corruption on International Investors?” NBER Working Paper No. 6030, Cambridge MA.

  • Sinn, H.-W. (1990). “Taxation and the Birth of Foreign Subsidiaries.” In H. Herberg and N. van Long (eds.), Trade, Welfare and Economic Policies, Studies in International Trade Policy. University of Michigan Press, pp. 325–352.

  • Slemrod, J. (1990). “Tax Effects on Foreign Direct Investment in the US: Evidence from a Cross-Country Comparison.” In A. Razin and J. Slemrod (eds.), Taxation in the Global Economy. University of Chicago Press.

  • Stanley, T. D. (2001). “Wheat from Chaff: Meta-Analysis as Quantitative Literature Review,” Journal of Economic Perspectives 15, 131–150.

    Google Scholar 

  • Swenson, D. L. (1994). “The Impact of US Tax Reform on Foreign Direct Investment in the United States,” Journal of Public Economics 54, 243–266.

    Google Scholar 

  • Swenson, D. L. (2001). “Transaction Type and the Effect of Taxes on the Distribution of Foreign Direct Investment in the United States.” In J. R. Hines (ed.), International Taxation and Multinational Activity. University of Chicago Press.

  • Tanzi, V. and A. L. Bovenberg. (1990). “Is there a Need for Harmonizing Capital Income Taxes within EC Countries?” In H. Siebert (ed.), Reforming Capital Income Taxation. Tubingen: Mohr.

    Google Scholar 

  • Young, K. H. (1988). “The Effects of Taxes and Rates of Return on Foreign Direct Investment in the United States,” National Tax Journal 41, 109–121.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. CPB Netherlands Bureau for Economic Policy Analysis, Erasmus University Rotterdam;, The Netherlands

    Ruud A. de Mooij & Sjef Ederveen

  2. CESifo;, Tinbergen Institute, The Netherlands

    Ruud A. de Mooij

Authors
  1. Ruud A. de Mooij
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Sjef Ederveen
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

de Mooij, R.A., Ederveen, S. Taxation and Foreign Direct Investment: A Synthesis of Empirical Research. International Tax and Public Finance 10, 673–693 (2003). https://doi.org/10.1023/A:1026329920854

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/A:1026329920854

Search

Navigation