An Empirical Study of the Impact of a Host Country's Tax Regime on Inbound and Outbound Foreign Direct Investment

This study aims to examine how a tax regime, composed of a host country's corporate taxes and tariffs, affects inbound and outbound foreign direct investment (FDI). It eventually aims to provide suggestions for policy makers in developing domestic and international tax structures that balance between inbound and outbound FDI The study empirically investigates the effect of tax structure on inbound and outbound FDI by using an adjusted model that includes the host country's corporate taxes and tariffs, based on the basic gravity model, which has been applied as a robust empirical model for analyzing international trade and FDI flows. Furthermore, we employ Vuong's test to determine if the adjusted inbound FDI or outbound determinant gravity model has a higher explanatory power than the existing gravity model. The empirical results are as follows. First, inbound FDI increases significantly when the corporate effective or statutory tax rates of the host country are relatively lower than those of other countries or when the tariff rates imposed on imported goods in the host country decrease. Second, outbound FDI can increase when the corporate effective tax rates of the multinational enterprise's (MNE's) home country are relatively higher than those of the host country. When we adopt the adjusted regression model in which corporate tax rates are measured by statutory tax rates, outbound FDI can increase with the relatively higher corporate tax rates of the ME's home country than that of the host country and the higher tariff rates of the host country. Meanwhile, the results of Vuong's test significantly supports our hypothesis that the explanatory power of the adjusted outbound FDI determinant gravity model considerably increases as compared with that of the existing gravity model. Therefore, the empirical results of this study intensify the opinion that tax burdens or incentives are deeply associated with inbound or outbound FDI, and imply that the adjusted outbound FDI gravity model is helpful to examine determinants of FDI or tax effects on FDI.