levels of the former depend on the applied assignment of taxing rights (i.e.,
credit, exemption or deduction method), bilateral withholding tax rates, and
depreciation allowances. These components exert a non-monotonic impact on
FDI. Accordingly, economic theory motivates an analysis of the role of corporate
taxation on FDI at the level of separate tax parameters rather than effective
tax rates.
The hypotheses can be derived from a theoretical approach that distin-
guishes between the respective parameters. For this, we employ a knowledge-
capital general equilibrium model of national and multinational firms as the un-
derlying framework. An empirical analysis relying on the components of corpo-
rate taxation has not yet been pursued. A crucial prerequisite for such an analy-
sis is the availability of a data base that disentangles these components. We
construct such a data base for all country-pairs covering 26 OECD economies
and the period 1991 to 2002. Our empirical findings for the role of corporate
taxation on FDI stocks within this sample provide strong support for the hy-
pothesis derived in a knowledge-capital general equilibrium model of national
and multinational firms. By and large, an increase in parent (host) country
statutory tax rates tends to foster (reduce) outbound FDI stocks. Host country
withholding tax rates exert an unambiguously negative impact on outbound
FDI. Parent and host country depreciation allowances have a non-monotonic
impact on outbound FDI, as expected from our theoretical model. The signs of
several of the parameters inherently depend on the relative factor endowment
configurations as predicted by the knowledge-capital model of multinational
firms.
Acknowledgements
We are grateful to Michael Devereux, Eckhard Janeba, Assaf Razin, Nadine
Riedel, Efraim Sadka, Hans-Werner Sinn and participants at the annual meet-
ings of the Austrian Economic Society, the Canadian Economic Association,
the Western Economic Association, the CESifo ”Global Economy” area confer-
ence, the ZEW Summer Workshop on ”EU Countries in Fiscal Competition”
in Mannheim, and seminars at the Universities of Innsbruck, Paderborn and at
the ifo Institute for helpful comments and suggestions. Financial support from
the Austrian Fond zur Forderung der Wissenschaflichen Forschung (FWF, grant
no. P 17028-G05) is gratefully acknowledged.
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