Journal Article

The impact of taxes on the extensive and intensive margins of FDI

January 4, 2021

International Tax and Public FinanceVol. 28, Issue 2, 2021, pp. 434-464

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It is well documented that foreign investment inflows are deterred by host taxes. What is less clear, however, is the degree to which these aggregate changes are driven by firm choices at the extensive (whether to invest) or intensive (how much to invest) margins. Further, there is little evidence on the way in which these two margins are affected by firm and home-country characteristics. We contribute by examining firm-level cross-border investments during 2007–2015 into Europe from a broad group of home countries at both investment margins. Similar to the existing single-country studies, we find that taxes operate primarily on the extensive margin. Building on those results, we delve further and find significant variation across firms with small investors from high-tax home countries especially sensitive to host taxation.