Corporate Tax Policy in Developed Countries and Economic Activity in Africa

SIEPR Working Paper No. 23-27

90 Pages Posted: 24 Oct 2022 Last revised: 6 Nov 2023

See all articles by Jeffrey L. Hoopes

Jeffrey L. Hoopes

University of North Carolina (UNC) at Chapel Hill - Accounting Area

Daniel Klein

University of Mannheim - Accounting and Taxation

Rebecca Lester

Stanford Graduate School of Business

Marcel Olbert

London Business School; ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research

Date Written: October 24, 2023

Abstract

This paper studies whether tax policies in developed nations affect developing economies. We study firm investment responses to a major reform that reduced the corporate income tax rate for U.K.-based firms. Our identification strategy compares subsidiary investment by U.K. multinational firms in Africa to those of multinationals with non-U.K. parent entities but similar ties to Africa. Difference-in-differences estimates show that U.K. multinational firms increased their subsidiary presence in sub-Saharan Africa by 22-28% following the U.K. reform. Exploiting location-specific nighttime luminosity data as well as local data from the African Demographic and Health Surveys, we also document increased economic activity and higher employment rates of African citizens within close proximity of local U.K.-owned subsidiaries. These effects are confirmed using novel data on local asset wealth. Our findings imply that, beyond the goal of motivating home-country investment, developed countries' corporate tax policies impact developing nations.

Keywords: Multinational Firms, Tax Rates, Foreign Investment, Economic Development

JEL Classification: D22, D25, F14, F21, F23, F63, J23, O1

Suggested Citation

Hoopes, Jeffrey L. and Klein, Daniel and Lester, Rebecca and Olbert, Marcel, Corporate Tax Policy in Developed Countries and Economic Activity in Africa (October 24, 2023). SIEPR Working Paper No. 23-27, Available at SSRN: https://ssrn.com/abstract=4254414 or http://dx.doi.org/10.2139/ssrn.4254414

Jeffrey L. Hoopes

University of North Carolina (UNC) at Chapel Hill - Accounting Area ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

Daniel Klein

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

Rebecca Lester (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

HOME PAGE: http://www.gsb.stanford.edu/faculty-research/faculty/rebecca-lester

Marcel Olbert

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research ( email )

United States

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