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How does FDI affect corporate tax revenue of the host country?

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Abstract

This paper investigates the effect of foreign direct investment (FDI) on the welfare of the host country through the process of corporate tax rate determination. Based on a theoretical model that allows for the entry of heterogenous multinational firms, we show that the impact of FDI on government revenue will depend on the competition effect and the technological spillovers. We argue that the competition effect reduces production of domestic firms and thereby lowers the level of corporate tax revenue while the technological spillovers can have positive or negative welfare effects depending on the absorptive capacity of local firms. The degree to which FDI contribute to government revenue in the host country depends also on the demand creation effect and technological transfer cost.

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  • Huu Thanh Tam Nguyen & Manh Hung Nguyen & Aditya Goenka, 2013. "How does FDI affect corporate tax revenue of the host country?," Documents de recherche 13-03, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    • Handle: RePEc:eve:wpaper:13-03
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    References listed on IDEAS

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    10. Sinani, Evis & Meyer, Klaus E., 2004. "Spillovers of technology transfer from FDI: the case of Estonia," Journal of Comparative Economics, Elsevier, vol. 32(3), pages 445-466, September.
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    Cited by:

    1. Abdramane Camara, 2019. "The effect of foreign direct investment on tax revenue in developing countries," Working Papers hal-03188025, HAL.

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    More about this item

    Keywords

    FDI; corporate tax revenue;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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