Abstract

http://ssrn.com/abstract=507162
 
 

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Capital Controls, Liberalizations, 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

July 2005

Harvard NOM Working Paper No. 04-24

Abstract:     
This paper evaluates the impact of capital controls and their liberalization on the activities of U.S. multinational firms. These firms attempt to circumvent capital controls by reducing reported local profitability and increasing the frequency of dividend repatriations. As a result, the reported profit impact of local capital controls is comparable to the effect of 27 percent higher corporate tax rates, and affiliates located in countries imposing capital controls are 9.8 percent more likely than other affiliates to remit dividends to parent companies. Multinational affiliates located in countries with capital controls face 5.25 percent higher interest rates on local borrowing than do affiliates of the same parent borrowing locally in countries without capital controls. Capital control liberalizations are associated with significant increases in multinational activity - property, plant and equipment grows at 6.9% faster annual rates following liberalizations. The combination of the costliness of avoidance and higher interest rates discourages investment in countries with capital controls, and this effect is reversed upon liberalization of controls.

Number of Pages in PDF File: 39

Keywords: Multinational firms, international finance, capital controls, liberalizations, FDI, repatriation, transfer pricing

JEL Classification: F21, F23, G15, H87, G18, G38

working papers series


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Date posted: February 23, 2004  

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Hines Jr., James R., Capital Controls, Liberalizations, and Foreign Direct Investment (July 2005). Harvard NOM Working Paper No. 04-24. Available at SSRN: http://ssrn.com/abstract=507162 or http://dx.doi.org/10.2139/ssrn.507162

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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