Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/174270
Authors: 
Davies, Ronald B.
Traistaru, Iulia
Studnicka, Zuzanna
Year of Publication: 
2016
Series/Report no.: 
ESRI Working Paper No. 537
Abstract: 
The design of optimal tax policy, especially with respect to attracting FDI, hinges on whether taxes affect multinational firms at the extensive or the intensive margins. Nevertheless, the literature has not yet explored the simultaneous impact of taxation on FDI on these two margins. Using firm-level cross-border investments into Europe during 2004-2013, we do so with a Heckman two-step estimator, an approach which also allows us to endogenize the number of investments and include home country and parent firm characteristics. We find that taxes affect both margins, particularly for firms that invest only once, with 92 percent of tax-induced changes in aggregate inbound FDI driven by movements at the extensive margin. In addition, we find significant effects of both home country and parent firm characteristics, pointing towards the granularity of investment decisions.
Subjects: 
Foreign direct investment
taxation
extensive margin
intensive margin
JEL: 
F23
F14
H25
Document Type: 
Working Paper

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