External finance dependence and FDI responsiveness to corporate taxes

Celine Azemar, Rodolphe Desbordes

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

We investigate whether the impact of higher corporate tax rates on foreign direct investment (FDI), at home or abroad, depends on the external financial dependence of a given sector. By structurally relying on debt for the funding of their operations, firms operating in externally dependent (ED) sectors in OECD countries benefit from the tax shield provided by the tax-deductibility of debt interest payments. We conjecture that this tax advantage is likely to make them less sensitive to changes in home and host countries’ corporate tax rates than firms in non-ED sectors when engaging in FDI. Using a new proprietary data on bilateral greenfield manufacturing FDI in OECD countries over the period 2003 to 2010, we find empirical support for this hypothesis as firms operating in externally dependent sectors appear to be much less sensitive to home and host corporate tax rates than firms operating in nonexternally dependent sectors.
Original languageEnglish
Pages (from-to)1472-1476
Number of pages5
JournalApplied Economics Letters
Volume20
Issue number16
Early online date22 Aug 2013
DOIs
Publication statusPublished - 2013

Keywords

  • corporate tax rate
  • external financial dependence
  • foreign direct investment

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