Competing for Scarce Foreign Capital: Spatial Dependence in the Diffusion of Double Taxation Treaties

International Studies Quarterly, 56 (4), 2012, pp. 645-660

47 Pages Posted: 16 Jun 2010 Last revised: 1 Apr 2013

See all articles by Fabian Barthel

Fabian Barthel

London School of Economics & Political Science (LSE)

Eric Neumayer

London School of Economics and Political Science (LSE)

Date Written: February 15, 2011

Abstract

Recent research suggests that double taxation treaties (DTTs) increase bilateral foreign direct investment (FDI). However, entering such a tax treaty is not unambiguously favourable for both partners if their bilateral FDI positions are asymmetric. Due to the usual bias towards residence-based taxation in DTTs, net-capital importers can face a considerable loss of tax revenues when entering these treaties. Nevertheless, there is an ever denser and growing global network of such treaties. This article argues that net-capital importing countries are caught in a prisoners’ dilemma: collectively, they would be better off refusing to sign DTTs, but each one has an incentive to sign DTTs to gain a competitive advantage. Countries will look toward and be influenced by the policy choices of other focal countries and will follow their DTT activity. We find evidence for such spatial dependence in our analysis of DTT diffusion in a global sample over the period 1969 to 2005. Dyads are more likely to sign a DTT the more DTTs have previously been concluded by the regional peers of the dyad members as well as by other countries who compete with at least one of the dyad members in terms of export product structure.

Keywords: Double Taxation Treaties, Competition, Spatial Dependence

JEL Classification: C41, D78, H77

Suggested Citation

Barthel, Fabian and Neumayer, Eric, Competing for Scarce Foreign Capital: Spatial Dependence in the Diffusion of Double Taxation Treaties (February 15, 2011). International Studies Quarterly, 56 (4), 2012, pp. 645-660. Available at SSRN: https://ssrn.com/abstract=1625773 or http://dx.doi.org/10.2139/ssrn.1625773

Fabian Barthel (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://personal.lse.ac.uk/barthel

Eric Neumayer

London School of Economics and Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 207 955 7598 (Phone)
+44 207 955 7412 (Fax)

HOME PAGE: http://personal.lse.ac.uk/neumayer

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