Tax Burden Influence on the Foreign Direct Investment Distribution by Economic Industries

Abstract

Promotion of foreign investment attractiveness, including tax incentive measures, for the purpose of economic development of a country and its particular industries is an important economic and tax policy problem. This article presents the results of construction and estimation of an empirical model that describes the influence of the capital tax burden indicator (average tax rates calculated for Russian economic industries using the OECD methodology) and the rate of return along with other industry characteristics on the distribution of FDI flows among Russian economic industries. Practical limitations derived from capital and investment market imperfections as well as data availability are discussed during the model development process. The results of estimation of various specifications of the constructed model on industry data for 29 Russian industries for the period 2006–2015 through the pool regression method show a generally significant negative effect of the tax burden indicator on foreign investment inflow into industries. For the full model specification, elasticity of FDI flow with respect to the tax burden indicator is equal to 0.88.

Keywords

• foreign direct investment
• tax burden
• average tax rate
• rate of return
• international tax competition
• empirical model
• industry data