Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/141862
Authors: 
Lebrand, Mathilde
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper 5885
Abstract: 
Tariffs have almost completely disappeared but various restrictions on foreign entry remain for multinationals. Many trade agreements and Bilateral Investment Treaties (BITs) have been signed to lower tariffs and reduce the risks of expropriation. Why do we see so few agreements removing FDI entry barriers? Could the contemporary rise of tax havens where multinationals can shift their profits explain the absence of FDI agreements? In this paper I develop a model in which governments can restrict the entry of foreign affiliates and multinationals can shift their profits across countries. I first demonstrate that the possibility for multinationals to repatriate their profits is a determinant of FDI restrictions. An agreement can solve for the resulting inefficiency. However, I show that an agreement is made unnecessary when (i) there is foreign lobbying that pushes for more entry, or when (ii) firms can shift profits to tax havens. Tax treaties that reduce profit shifting would be a first step towards more agreements that reduce FDI restrictions. I conclude by providing empirical evidence that profit shifting affects the choice of FDI restrictions.
Subjects: 
FDI
multinationals
investment agreements
lobby
profit shifting
JEL: 
F23
D43
D72
F13
Document Type: 
Working Paper

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