Are Tax Havens Good Neighbors? An LDC Perspective
26 Pages Posted: 22 Jul 2009 Last revised: 4 Apr 2011
Date Written: July 10, 2009
Abstract
Tax competition and spillover models offer ambiguous predictions of tax haven impacts on non-tax havens. The implications of tax havens for less developed countries (LDCs), in particular, are not well understood and are little studied. This paper investigates the impact of tax havens on foreign direct investment (FDI) in non-tax haven LDCs. We investigate spillover and agglomeration factors by including measures of proximity to the nearest tax haven and the level of FDI inflows in the nearest tax haven. Employing cross sectional data of 115 LDCs from 1990 to 2006, we find evidence of spillovers from tax havens to nearby LDCs. FDI inflows in LDCs are positively and significantly related to FDI inflows in the nearest tax haven. Geographic diffusion has nuanced effects. LDCs at a medium distance to the nearest tax haven have higher levels of FDI than LDCs that are close to a tax haven. On the other hand, LDCs at a medium distance to a tax haven are less influenced by FDI spillovers compared with LDCs at closer proximity. Taken together, our results suggest that tax havens make good regional neighbors, but not good immediate neighbors for LDCs. These findings are robust to several model specifications, including one with spatially correlated error terms..
Keywords: Tax havens, Foreign Direct Investment, Less Developed Countries, Spatial Econometrics
JEL Classification: H87, F21
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Fiscal Paradise: Foreign Tax Havens and American Business
By James R. Hines Jr. and Eric M. Rice
-
Altered States: Taxes and the Location of Foreign Direct Investment in America
-
Tax Policy and Foreign Direct Investment in the United States
-
Coming Home to America: Dividend Repatriations by U.S. Multinationals
-
Taxation and Foreign Direct Investment: A Synthesis of Empirical Research
By Ruud A. De Mooij and Sjef Ederveen
-
Income Shifting in U.S. Multinational Corporations
By David Harris, Randall Morck, ...