How corporate tax policy affects foreign investment

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Increase in economic activity and employment

Leveraging location-specific nighttime light data and data from African Demographic and Health Surveys, the researchers also detected increased economic activity and higher employment rates of African citizens in close proximity (10 kilometers) to branch offices. belonging to the UK. The results clearly imply that beyond the objective of stimulating investment in the home country, corporate tax cuts in developed countries are likely to have a significant economic impact in developing countries. development, given that multinational corporations account for a significant share of resource allocation in the global economy.

The idea for this article was born out of recent research showing that tax cuts encourage multinationals to invest more in their home country; therefore, the authors postulated that because they operate globally, multinationals might also invest more in foreign countries. Dr Olbert says: “This gives us a unique tool to study the effects of multinational business investment in developing countries, which is extremely important and relatively understudied because little high quality data has historically been available.

The real area of ​​interest for researchers is the development economics angle, says Dr. Olbert: “We looked at this fiscal policy framework more as a tool to study the real research question, which is: what are the wider economic consequences in developing countries? when do multinational firms invest more? We are interested in the local consequences. It was really the idea that led to the research.

The paper offers insight into an important but unexplored consequence of corporate income tax cuts for corporations in developed countries like the UK. His findings imply that beyond the purpose of motivating investment in the home country, corporate tax cuts in developed countries are a channel of economic impact in developing countries.

But, as Dr. Olbert is quick to point out, the long-term sustainable benefit for developing countries is unclear: “There is much debate about whether investments by multinational corporations are a positive outcome or negative for developing countries. Is this always a good thing? Is it the exploitation of developing local economies? For example, are domestic companies suffering from competition? Or is it a good thing in terms of increasing average income, employment and other social benefits for the local population? »

Regarding the targeting of tax reforms at increased foreign investment by multinationals, Dr. Olbert again advises caution: “You have to be careful in saying that there may be a direct expected consequence. We simply document what are likely to be unintended or underexplored externalities of national tax policies and say that these consequences may follow a particular reduction. This does not mean that if, for example, Germany reduced the corporate tax rate by 10% today, developing countries would gain. We can only say: “It was an unexpected ripple effect of British fiscal policy”.

Implications for the investment community

There are, however, useful lessons for the investment community, says Dr. Olbert: “The competitive angle is important. Consider that you are an investor, entrepreneur or business owner in one country and have competitors who are based or headquartered in another country, and that other country makes the tax regime more attractive. This likely puts you at a competitive disadvantage, as your competitor now enjoys a more attractive tax regime. I think this is the key takeaway for the business owner or the investment community, and research I have with another team of co-authors provides consistent evidence for this effect.

“For the investment community, the issue of offshoring risk and tax policy at a broader level is also important. Where businesses are highly mobile – and they are becoming more mobile every day in the digital economy – they may decide to relocate functions or resources or perhaps even entire operations to a foreign country where the tax environment becomes more advantageous.

Marcel Olbert is Assistant Professor of Accountancy at London Business School. He teaches a core course in the LBS MBA program and was recently ranked first in the list of Top 10 MBA Professors to Watch in 2022.

“Foreign Aid Through Domestic Tax Reforms? Evidence of the presence of multinational companies in developing countries is currently underway. It is co-authored by Jeffrey L. Hoopes, associate professor of accounting, University of North Carolina at Chapel Hill; Daniel Klein, PhD Student, Business Economics, University of Mannheim; and Rebecca Lester, associate professor of accounting, Stanford University.

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