| Tax incentives have been used widely by developing countries to encourage foreign direct investment (FDI). However, empirically, there is no convincing evidence that tax preferences are effective in attracting FDI. To fill in the void, this dissertation studies the effect of the host and home country taxes on FDI flows to Indonesia, Malaysia, the Philippines, and Thailand. In addition, the role of such factors as change in tax policy, product price, capital stock, and wages is investigated. A function of demand for foreign capital introduced by Lucas (1993) is used to estimate the relationship between FDI and the independent variables.; FDI flows from six home countries---the United States, Japan, Korea, Singapore, Taiwan, and Hong Kong---are taken into consideration. As a result, there are six econometric equations for each of the four host countries in the constructed model. The FDI data are also disaggregated into six industries: electronics and electrical industry, textile industry, chemical and pharmaceutical industry, wood and wood product industry, rubber and rubber product industry, and paper, printing and publishing industry. The model is estimated with the use of the seemingly unrelated regression (SUR) model.; The results of estimation provide empirical evidence that tax incentives offered by Indonesia, Malaysia, the Philippines, and Thailand are not effective in attracting FDI. On the other hand, the home country taxes turn out to be a significant determinant of FDI from all host countries and for FDI in several industries. The effect of the tax policy change, product price, and capital stock on FDI is mixed, varying by country and industry. Wages are found to be significant for FDI in Indonesia, Malaysia, and Thailand, and for FDI in four industries; Among policy implications drawn from this study is the recommendation to abolish tax incentives and to introduce nontax incentives, such as employment incentives and better training for workers. The study also indicates that it is important for host countries to have tax-sparing agreement with their trade partners to make tax exemption by host countries fully credited by home countries. |
