Taxation and Ownership Structure in Supplying Foreign Markets

We examine the impact of taxation on foreign direct investment (FDI) flows. Previous research has focused on the impact of the corporate income taxes on aggregate FDI flows. We contribute in the relevant literature in three areas. First, the flows of FDI are classified in two categories according to parent company’s share of ownership of its foreign subsidiary receiving the FDI flow: FDI to majority owned (MOS) and to minority owned subsidiaries (MIS). Second, three different taxation schemes in the host country are considered: the corporate income taxes, the capital gains taxes and the dividend withholding taxes. Third, we study the interactive impact of multiple taxations on FDI flows. Our empirical results indicate that both individually and interactively, the three tax rates have a strong and statistically significant impact on FDI flows to MOS and a much weaker impact on FDI flows to MIS.