The Tax Sensitivity of Foreign Direct Investment: Evidence from Firm-Level Panel Data

38 Pages Posted: 30 Sep 2009 Last revised: 3 Nov 2009

See all articles by Jason G. Cummins

Jason G. Cummins

Brevan Howard Asset Management LLP

R. Glenn Hubbard

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: April 1994

Abstract

Understanding the determinants of foreign direct investment (FDI) is important for analyzing capital flows and the industrial organization of multinational firms. Most empirical studies of FDI, however, have focused on case studies of nontax factors in overseas investment decisions or on discerning reduced-form relationships between some measure of FDI and variables relating to nontax and tax aspects of the investment decision. In this paper, we examine the effects of taxation on FDI using previously unexplored (for this purpose) panel data on FDI by subsidiaries of U.S. multinational firms collected by Compustat's geographic segment file project. These firm- level data contain information on new capital investment overseas which enable us to measure tax influences on FDI more precisely and allow us to focus on structural models of subsidiaries' investment decision. Our empirical results cast significant doubt on the simplest notion that 'taxes don't matter' for U.S. firms' FDI decisions. Tax parameters influence FDI in precisely the way indicated by neoclassical models. Our results also lend support to the application of the 'tax capitalization' model to the study of dividend repatriation and foreign direct investment decisions.

Suggested Citation

Cummins, Jason Gustav and Hubbard, Robert Glenn, The Tax Sensitivity of Foreign Direct Investment: Evidence from Firm-Level Panel Data (April 1994). NBER Working Paper No. w4703. Available at SSRN: https://ssrn.com/abstract=1480522

Jason Gustav Cummins (Contact Author)

Brevan Howard Asset Management LLP ( email )

London, SW1Y 6XA
United Kingdom

Robert Glenn Hubbard

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://www.gsb.columbia.edu/faculty/ghubbard

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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