Capital Controls, Liberalizations, and Foreign Direct Investment

39 Pages Posted: 23 Feb 2004  

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

C. Fritz Foley

Harvard Business School; National Bureau of Economic Research (NBER)

James R. Hines Jr.

University of Michigan; NBER

Multiple version iconThere are 3 versions of this paper

Date Written: July 2005

Abstract

This paper evaluates the impact of capital controls and their liberalization on the activities of U.S. multinational firms. These firms attempt to circumvent capital controls by reducing reported local profitability and increasing the frequency of dividend repatriations. As a result, the reported profit impact of local capital controls is comparable to the effect of 27 percent higher corporate tax rates, and affiliates located in countries imposing capital controls are 9.8 percent more likely than other affiliates to remit dividends to parent companies. Multinational affiliates located in countries with capital controls face 5.25 percent higher interest rates on local borrowing than do affiliates of the same parent borrowing locally in countries without capital controls. Capital control liberalizations are associated with significant increases in multinational activity - property, plant and equipment grows at 6.9% faster annual rates following liberalizations. The combination of the costliness of avoidance and higher interest rates discourages investment in countries with capital controls, and this effect is reversed upon liberalization of controls.

Keywords: Multinational firms, international finance, capital controls, liberalizations, FDI, repatriation, transfer pricing

JEL Classification: F21, F23, G15, H87, G18, G38

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Hines Jr., James R., Capital Controls, Liberalizations, and Foreign Direct Investment (July 2005). Harvard NOM Working Paper No. 04-24. Available at SSRN: https://ssrn.com/abstract=507162 or http://dx.doi.org/10.2139/ssrn.507162

Mihir A. Desai (Contact Author)

National Bureau of Economic Research (NBER)

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C. Fritz Foley

Harvard Business School ( email )

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National Bureau of Economic Research (NBER)

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James Rodger Hines

University of Michigan ( email )

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NBER

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