Corporate Tax Policy in Developed Countries and Economic Activity in Africa

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