Multinational Firms’ Heterogeneity in Tax Responsiveness: the Role of Transfer Pricing

In this paper we show that the ability of multinational firms to manipulate transfer prices affects the tax sensitivity of foreign direct investment (FDI). We offer a model of international capital allocation where firms are heterogeneous in their ability to manipulate transfer prices. Perhaps paradoxically, we show that the ability to shift profits can make parent companies' investment more sensitive to host-country tax rates, as long as investors expect fisscal authorities to use price and profit detection methods. We then offer a comprehensive empirical study to test our predictions in the case of Japanese FDI. We exploit the finding that the unobservable ability to manipulate transfer prices is correlated with whole ownership of a±liates and R&D expenditure. Based on country, parent firm and sector characteristics, we estimate an investment equation on a sample of 3614 Japanese affiliates in 49 emerging countries. We obtain a greater semi-elasticity of investment to the statutory tax rate in a±liates that are wholly-owned and that have R&D intensive parents. We interpret these results as indirect evidence that abusive transfer pricing is one of the determinants of FDI activity.

Public Governance, Health and Foreign Direct Investment in Sub-Saharan Africa

In this paper we diverge from the existing empirical literature on FDI determinants in two ways. First, we decompose the sources of the foreign direct investment (FDI) gap between Sub-Saharan Africa (SSA) and other developing regions. Once market size has been accounted for, we nd that SSA's FDI de cit is mostly explained by insufficient provision of public goods: low human capital accumulation, especially health, in SSA explains 100-140% of the inter-regional FDI gaps. Second, we estimate the indirect effect of infectious diseases on FDI through their direct impact on health. We find that a 1% point rise in HIV prevalence in the adult population is associated with a decrease in net FDI inflows of 3.5%, while a country in which 100% of the population is at risk of contracting deadly malaria receives about 16% less FDI than a similar country located in a malaria-free region.

International Corporate Taxation and U.S. Multinationals’ Behavior: an Integrated Approach

Using data from the International Revenue Service, this paper explores the effcts of corporate taxation on U.S. capital invested abroad and on tax planning practices (dividend payments, income shifting, and passive investment). The econometric analysis first indicates that investment is strongly influenced by average tax rates, with a magnified impact for particularly low-tax rates implying that the attractiveness of low-tax countries is not weakened by anti-deferral rules and cross-crediting limitations. Further explorations suggest that firms report higher profit and are less likely to repatriate dividends when they are located in low-tax jurisdictions. Firms also report higher Subpart F income in countries in which they shift their profit, suggesting that cross-crediting provides an incentive to shift passive income in low-tax countries and that passive investment can be an alternative strategy to minimize taxes when active investment opportunities are lacking. Finally, the paper estimates the role of effective transfer pricing regulation on income shifting activities using the quality of host countries' law enforcement. It appears that low degrees of law enforcement are associated with higher income-shifting.

Short-Run Strategies For Attracting Foreign Direct Investment

This paper empirically investigates the effectiveness and feasibility of two FDI policies, fiscal incentives and deregulation, aimed at improving the attractiveness of a country in the short run. Using disaggregated data on sales by US MNEs’ foreign affiliates in 43 developed and developing countries over the 1982-1994 period, results show that the provision of fiscal incentives or the deregulation of the labour market would exert a positive impact on total FDI. Given the drawbacks frequently associated with the use of incentive packages, economy-wide policies which ease firing procedures and reduce severance payments would certainly be the best policy option. This paper also highlights the different aggregation and omitted variable biases that have affected results of previous studies and provides some support to recent theoretical models of FDI by showing that third country effects and spatial interdependence influence respectively the location of export-platform FDI and vertical FDI.

Who Ultimately Bears the Burden of Greater Non-Wage Labour costs?

We investigate the effect of a rise in non-wage labour costs (NWLC) on real anufacturing labour costs in OECD countries, taking into account the degree of coordination in the wage bargaining process. We find that, in countries in which wage bargaining is not highly coordinated, 55% of an increase in NWLC appears to be shifted to workers in the long run, whereas in countries operating under a highly coordinated bargaining regime, full shifting occurs. Overall, our results suggest that high NWLC can be associated with a high equilibrium unemployment rate, but only in those OECD countries that do not have highly coordinated wage bargaining.

Short-Run Strategies For Attracting Foreign Direct Investment

This paper empirically investigates the effectiveness and feasibility of two FDI policies, fiscal incentives and deregulation, aimed at improving the attractiveness of a country in the short run. Using disaggregated data on sales by US MNEs’ foreign affiliates in 43 developed and developing countries over the 1982-1994 period, results show that the provision of fiscal incentives or the deregulation of the labour market would exert a positive impact on total FDI. Given the drawbacks frequently associated with the use of incentive packages, economy-wide policies which ease firing procedures and reduce severance payments would certainly be the best policy option. This paper also highlights the different aggregation and omitted variable biases that have affected results of previous studies and provides some support to recent theoretical models of FDI by showing that third country effects and spatial interdependence influence respectively the location of export-platform FDI and vertical FDI.

Market Familiarity and the Location of South and North MNEs

We use a systematic empirical analysis of the determinants of South-South (SS) and North-South (NS) foreign direct investment (FDI) as a canvas to explore how multinational enterprises’ (MNEs) location decisions are shaped by better acquaintance with a foreign market resulting from bilateral ties, experience of international expansion, and knowledge of how to deal with poor governance. We find that these various aspects of market familiarity, which can interact together, are important to explain and differentiate the location behaviours of South MNEs (S-MNEs) and North MNEs (N-MNEs) in developing countries.