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Host-country governance, tax treaties and US direct investment abroad

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Abstract

We investigate how the quality of the host-country governance and a bilateral US income tax treaty affect the rates of return that US companies require on their foreign direct investment (FDI). Using indexes of corruption and political instability, we find that poor governance causes the companies to require significantly higher rates of return. This lends support to earlier authors who have concluded that poor governance discourages both local investment and inward FDI. After accounting for the quality of host-country governance, however, no evidence could be found that an income tax treaty has any effect on the required rates of return.

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Authors and Affiliations

  1. Office of Tax Analysis, US Department of Treasury, 15000 Pennsylvania Ave. NW, Washington, DC, 20220, USA

    Henry J. Louie

  2. Department of Taxation, State of Hawaii, Honolulu, USA

    Donald J. Rousslang

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  1. Henry J. Louie
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  2. Donald J. Rousslang
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Correspondence to Henry J. Louie.

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Louie, H.J., Rousslang, D.J. Host-country governance, tax treaties and US direct investment abroad. Int Tax Public Finance 15, 256–273 (2008). https://doi.org/10.1007/s10797-007-9020-5

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  • DOI: https://doi.org/10.1007/s10797-007-9020-5

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