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 2007-2015, we do so using both a conditional logit two-step estimation and a Heckman selection approach, the latter of which also allows us to examine the influence of home country taxes. We find that host, but not home, taxes affect FDI and that their impact is primarily at the extensive margin. These estimates suggest that approximately 96% of aggregate tax-induced changes to greenfield FDI flows occur due to fewer firms, not smaller ones. In addition, we find significant effects of both home country and global ultimate owner characteristics, pointing towards the granularity of investment decisions. In particular, we find that larger owners are less sensitive to host tax changes, consistent with recent evidence on differences in transfer pricing behavior.
07.12.2017 | 14:00 - 15:00
ZEW – Leibniz-Zentrum für Europäische Wirtschaftsforschung
L 7, 1 68161 Mannheim