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Tax Burden, Institutional Environment and Foreign Direct Investment Flow: From the Perspective of Asymmetric International Tax Competition

【Authors】
LIU Xiaochuan (Shanghai University of Finance and Economics, 200433)GAO Mengmeng (Shanghai Lixin University of Accounting and Finance, 201600)
【WorkUnit】
【Abstract】

At present, as world economy faces growing uncertainties, governments should, while trying to attract foreign direct investment (FDI) flow by reducing tax burden, put in place sound supporting measures to help adapt to changes in the external environment over the long run. Based on the theory of asymmetric tax competition, this paper constructs a theoretical model with tax burden, institutional transaction cost and FDI flow. Theoretical research found that an advantageous institutional environment can make the equilibrium tax rate of one country higher than that of another when their market scales are within a certain range. Using the data of 199 countries, this paper proves that a good institutional environment reduces the negative impact of tax burden on FDI flow, and finds that in countries with a small market and low income, heavy tax burden has stronger negative impact on FDI, yet a good institutional environment has no significant impact; for countries with a larger market and high income, tax burden does not have a significant negative impact, while a sound institutional environment does have positive impact. Finally, this paper puts forward policy recommendations regarding how to make good use of and improve the institutional environment to meet the challenges of the international economic situation.

JEL:H21, F21, F23

【KeyWords】
Tax Burden, Institutional Environment, Foreign Direct Investment, Market Scale