Abstract

http://ssrn.com/abstract=332268
 
 

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Chains of Ownership, Regional Tax Competition, and Foreign Direct Investment


Mihir A. Desai


Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

C. Fritz Foley


Harvard Business School; National Bureau of Economic Research (NBER)

James R. Hines Jr.


University of Michigan; NBER

September 2002

NBER Working Paper No. w9224

Abstract:     
This paper considers the effect of taxation on the location of foreign direct investment (FDI) and taxable income reported by multinational firms with particular attention to the regional dynamics of tax competition and the role of chains of ownership. Confidential affiliate-level data are used to compare the investment and income-reporting behavior of American-owned foreign affiliates across ownership forms and regions. Ten percent higher tax rates are associated with 5.0 percent lower FDI, controlling for parent company and observable aspects of local economies, and 0.9 percent lower returns on assets, controlling for parent company and level of FDI. Tax effects are particularly strong within Europe, where ten percent higher tax rates are associated with 7.7 percent lower FDI and 1.7 percent lower returns on assets. Indirectly owned foreign affiliates also exhibit strong tax effects, ten percent higher tax rates being associated with 12.0 percent lower FDI and 1.4 percent lower returns on assets. American firms finance a growing fraction of their foreign operations indirectly through chains of ownership, which now account for more than 30 percent of aggregate foreign assets and sales. Ownership chains are particularly concentrated among European affiliates. Since multinational firms from countries other than the United States face tax environments similar to those faced by indirectly owned affiliates of American companies, these results suggest a greater sensitivity of FDI to taxes for non-American firms. The results also suggest that European economic integration may have the effect of intensifying tax competition between European jurisdictions.

Number of Pages in PDF File: 44

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Date posted: September 19, 2002  

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Hines Jr., James R., Chains of Ownership, Regional Tax Competition, and Foreign Direct Investment (September 2002). NBER Working Paper No. w9224. Available at SSRN: http://ssrn.com/abstract=332268

Contact Information

Mihir A. Desai (Contact Author)
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
C. Fritz Foley
Harvard Business School ( email )
Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
617-495-6375 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
James Rodger Hines
University of Michigan ( email )
625 South State Street
Ann Arbor, MI 48109-1215
United States
NBER
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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