Business regulations, taxation, and foreign direct investment

My thesis is a collection of three papers analyzing the effects of government policies and regulations on foreign direct investment (FDI). In the first paper, we find empirical evidence of a nonlinear threshold effect in the relationship between FDI inflows and business regulatory costs. When a host country's regulatory costs are sufficiently low, a further decrease in regulations may not stimulate and, in fact, may even decrease FDI inflows. On the other hand, beyond some threshold, FDI inflows significantly rise as the regulatory costs fall. These results imply that while a fall in the costs could stimulate FDI inflows in heavily regulated countries, it might be counterproductive in low-cost countries. Also, we find that as regulatory costs rise, the marginal effect of taxes on FDI inflows falls. In other words, in low regulatory cost countries, tax incentives might be more effective to attract FDI than those in heavily regulated countries.;In the second paper, we develop a theoretical model with a dual tax system that provides preferential treatments for foreign investment. In order to benefit from the preferential tax incentives and gain better property rights, high-productivity domestic firms intend to disguise as foreign firms via a practice of round-tripping. We found that these preferential policies not only lead to government revenue losses; they also impose a higher tax rate on low-productivity and small firms. In addition, numerical simulation techniques are used to illustrate the impact of China's upcoming corporate income tax reforms scheduled for 2008. We found that China's domestic investment could decrease along with FDI under the upcoming unified system, though the tax rate on domestic firms falls.;The third paper provides empirical evidence of the effects of round-tripping incentives on the scale of round tripping, using the data on FDI reporting discrepancies between host and source countries. We found that the reporting discrepancies between countries is negatively correlated with FDI host countries' property rights protection and political stability, and positively related to the host countries preferential tax incentives. These results imply that FDI reporting discrepancies may be caused not purely by measurement errors but also by round-tripping.