Optimal tax policy and foreign direct investment under ambiguity

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

We analyze the optimal timing of an irreversible foreign direct investment by a foreign firm and the optimal tax policy by a host country under ambiguity. We derive the optimal GDP level at which the foreign firm switches from exporting to a foreign direct investment. Furthermore, we derive the optimal tax policy by the host country, and analyze the effect of an increase in ambiguity on the optimal tax policy. We show that the host country should reduce the optimal corporate tax rate from the host government's perspective in response to an increase in ambiguity. Our result is different from the one obtained by Pennings (2005) that shows that an increase in risk induces an increase in the optimal corporate tax rate.

Original languageEnglish
Pages (from-to)185-200
Number of pages16
JournalJournal of Macroeconomics
Volume32
Issue number1
DOIs
Publication statusPublished - Mar 2010

Fingerprint

Host country
Foreign direct investment
Optimal tax
Tax policy
Corporate tax rates
Foreign firms
Optimal timing
Exporting
Government
Increase in risk

Keywords

  • Ambiguity
  • Foreign direct investment
  • Optimal tax

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Optimal tax policy and foreign direct investment under ambiguity. / Asano, Takao.

In: Journal of Macroeconomics, Vol. 32, No. 1, 03.2010, p. 185-200.

Research output: Contribution to journalArticle

@article{a1302ee757e34926974e06d3bbf74394,
title = "Optimal tax policy and foreign direct investment under ambiguity",
abstract = "We analyze the optimal timing of an irreversible foreign direct investment by a foreign firm and the optimal tax policy by a host country under ambiguity. We derive the optimal GDP level at which the foreign firm switches from exporting to a foreign direct investment. Furthermore, we derive the optimal tax policy by the host country, and analyze the effect of an increase in ambiguity on the optimal tax policy. We show that the host country should reduce the optimal corporate tax rate from the host government's perspective in response to an increase in ambiguity. Our result is different from the one obtained by Pennings (2005) that shows that an increase in risk induces an increase in the optimal corporate tax rate.",
keywords = "Ambiguity, Foreign direct investment, Optimal tax",
author = "Takao Asano",
year = "2010",
month = "3",
doi = "10.1016/j.jmacro.2009.12.006",
language = "English",
volume = "32",
pages = "185--200",
journal = "Journal of Macroeconomics",
issn = "0164-0704",
publisher = "Elsevier BV",
number = "1",

}

TY - JOUR

T1 - Optimal tax policy and foreign direct investment under ambiguity

AU - Asano, Takao

PY - 2010/3

Y1 - 2010/3

N2 - We analyze the optimal timing of an irreversible foreign direct investment by a foreign firm and the optimal tax policy by a host country under ambiguity. We derive the optimal GDP level at which the foreign firm switches from exporting to a foreign direct investment. Furthermore, we derive the optimal tax policy by the host country, and analyze the effect of an increase in ambiguity on the optimal tax policy. We show that the host country should reduce the optimal corporate tax rate from the host government's perspective in response to an increase in ambiguity. Our result is different from the one obtained by Pennings (2005) that shows that an increase in risk induces an increase in the optimal corporate tax rate.

AB - We analyze the optimal timing of an irreversible foreign direct investment by a foreign firm and the optimal tax policy by a host country under ambiguity. We derive the optimal GDP level at which the foreign firm switches from exporting to a foreign direct investment. Furthermore, we derive the optimal tax policy by the host country, and analyze the effect of an increase in ambiguity on the optimal tax policy. We show that the host country should reduce the optimal corporate tax rate from the host government's perspective in response to an increase in ambiguity. Our result is different from the one obtained by Pennings (2005) that shows that an increase in risk induces an increase in the optimal corporate tax rate.

KW - Ambiguity

KW - Foreign direct investment

KW - Optimal tax

UR - http://www.scopus.com/inward/record.url?scp=76349095124&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=76349095124&partnerID=8YFLogxK

U2 - 10.1016/j.jmacro.2009.12.006

DO - 10.1016/j.jmacro.2009.12.006

M3 - Article

AN - SCOPUS:76349095124

VL - 32

SP - 185

EP - 200

JO - Journal of Macroeconomics

JF - Journal of Macroeconomics

SN - 0164-0704

IS - 1

ER -