Capital Controls, Liberalizations, and Foreign Direct Investement

37 Pages Posted: 15 Mar 2004

See all articles by Mihir A. Desai

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: March 2004

Abstract

Affiliate-level evidence indicates that American multinational firms circumvent capital controls by adjusting their reported intrafirm trade, affiliate profitability, and dividend repatriations. As a result, the reported profit impact of local capital controls is comparable to the effect of 24 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 5.4 percent higher interest rates on local borrowing than do affiliates of the same parent borrowing locally in countries without capital controls. Together, the costliness of avoidance and higher interest rates raise the cost of capital, significantly reducing the level of foreign direct investment. American affiliates are 13-16 percent smaller in countries with capital controls than they are in comparable countries without capital controls. These effects are reversed when countries liberalize their capital account restrictions.

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Hines, James Rodger, Capital Controls, Liberalizations, and Foreign Direct Investement (March 2004). NBER Working Paper No. w10337. Available at SSRN: https://ssrn.com/abstract=515762

Mihir A. Desai (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
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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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United States

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