Quality Versus Quantity - The Composition Effect of Corporate Taxation on Foreign Direct Investment

30 Pages Posted: 18 Oct 2007

See all articles by Johannes Becker

Johannes Becker

University of Cologne

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich; Ludwig-Maximilians-University, Munich; Center for Economic Studies (CES)

Date Written: October 2007

Abstract

This paper studies corporate taxation in a model where foreign investment of firms may affect the profitability of the investor firm's domestic activities. In this framework, corporate taxes distort the quality, not just the quantity of foreign direct investment flows. High-tax countries may see their tax revenues decrease in response to inbound foreign direct investment. Our results also imply that empirical studies on international profit shifting may overestimate the role of profit shifting. Observed profitability differences between high and low tax countries may be due to project selection. Empirical evidence in support of the main hypotheses is provided using aggregate investment and tax revenue data from a sample of OECD countries.

Keywords: corporate taxation, foreign direct investment

JEL Classification: H25, F23

Suggested Citation

Becker, Johannes and Fuest, Clemens, Quality Versus Quantity - The Composition Effect of Corporate Taxation on Foreign Direct Investment (October 2007). CESifo Working Paper No. 2126. Available at SSRN: https://ssrn.com/abstract=1022511

Johannes Becker

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Clemens Fuest (Contact Author)

ifo Institute – Leibniz Institute for Economic Research at the University of Munich

Poschinger Str. 5
Munich, DE 81679
Germany
++89-9224-1430 (Phone)

Ludwig-Maximilians-University, Munich ( email )

Schackstrasse 4 / II
Munich, DE 80539
Germany

Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, DE 80539
Germany
++89 2180-2748 (Phone)
++89 2180-17845 (Fax)

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