Playing Easy or Playing Hard to Get: When and How to Attract FDI

46 Pages Posted: 7 Jul 2020

See all articles by Thomas A. Gresik

Thomas A. Gresik

University of Notre Dame - Department of Economics

Dirk Schindler

Erasmus School of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Guttorm Schjelderup

Norwegian School of Economics (NHH) - Department of Business and Management Science

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Date Written: June 30, 2020

Abstract

We study the link between a country’s institutional quality in tax collection and its optimal corporate tax policies in a model of heterogeneous multinationals that can shift income using both debt and transfer prices. Countries with weak institutional quality can be made worse off adopting policies that attract FDI as the benefits from higher wages and production are more than offset by tax base erosion. Countries with moderate institutional quality can gain from under-utilizing their ability to collect taxes, since the benefit of attracting more FDI outstrips the benefit of increased tax revenue. Countries with very strong institutions benefit from FDI and should utilize their full ability to collect taxes.

Keywords: FDI, thin capitalization rules, transfer pricing, institutional quality

JEL Classification: F23, F68, H26, H32

Suggested Citation

Gresik, Thomas A. and Schindler, Dirk and Schjelderup, Guttorm, Playing Easy or Playing Hard to Get: When and How to Attract FDI (June 30, 2020). NHH Dept. of Business and Management Science Discussion Paper No. 2020/7, Available at SSRN: https://ssrn.com/abstract=3641378 or http://dx.doi.org/10.2139/ssrn.3641378

Thomas A. Gresik

University of Notre Dame - Department of Economics ( email )

3060 Jenkins Nanovic Halls
University of Notre Dame
Notre Dame, IN 46556
United States

Dirk Schindler

Erasmus School of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Guttorm Schjelderup (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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