| The objective of this dissertation is to study the impact of tax sparing credits on foreign direct investment (FDI) in developing countries. Tax sparing is an international treaty provision which allows tax incentives from a developing country to flow to the investing firm, rather than to the developed country treasury (because of the interaction of international taxes). The analytical section shows that tax details in the developed country affects the extent to which tax sparing serves as an investment incentive. This paper uses a unique data source to study the effects on Japanese FDI (the only example in the current literature) as well as FDI from the UK, Italy, and Germany. One key to this examination is to estimate a fully simultaneous model on FDI from each of the four developed economies to 32 developing countries from 1980--98. Relative to US FDI (which does not use tax sparing), I find that tax sparing does not have stimulative effect on UK, Italian, and German FDI (due to other elements in the developed countries' tax codes). I also find that tax sparing credits stimulate worldwide FDI, as estimated reductions in FDI from the rest of the world are less than half of the estimated FDI resulting from tax sparing credit. |
