Baltic Journal of Economics (Jan 2024)

Relative factor endowments, foreign direct investment and tax planning of multinational firms: an empirical investigation into cross-country data

  • Andrzej Cieślik,
  • Oleg Gurshev

DOI
https://doi.org/10.1080/1406099X.2023.2296738
Journal volume & issue
Vol. 24, no. 1
pp. 30 – 57

Abstract

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This paper studies the impact of relative endowments of skilled labour and physical capital on the location choices of multinational firms (MNEs). We demonstrate potential methodological issues and possible solutions related to the identification of vertical MNE activity when using aggregate country-level data. To support our analysis, we introduce data matching and various assumptions with respect to the degree of profit shifting activities of MNEs that we apply to study unilateral inward foreign direct investment (FDI) across Estonia, Latvia, and Lithuania. Our choice of data is motivated by various legislation gaps, taxation specificities, and growing equity stocks in sectors related to profit shifting in the aforementioned economies. Ultimately, we highlight the importance of international tax differences and the growing discrepancy between real and reported cross-country FDI data.

Keywords