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What makes a country attractive to foreign investors? To what extent do conditions of governance and politics matter? This book provides the most systematic exploration to date of these crucial questions at the nexus of politics and economics. Using quantitative data and interviews with investment promotion agencies, investment location consultants, political risk insurers, and decision makers at multinational corporations, Nathan Jensen arrives at a surprising conclusion: Countries may be competing for international capital, but government fiscal policy--both taxation and spending--has little impact on multinationals' investment decisions. Although government policy has a limited ability to determine patterns of foreign direct investment (FDI) inflows, political institutions are central to explaining why some countries are more successful in attracting international capital. First, democratic institutions lower political risks for multinational corporations. Indeed, they lead to massive amounts of foreign direct investment. Second, politically federal institutions, in contrast to fiscally federal institutions, lower political risks for multinationals and allow host countries to attract higher levels of FDI inflows. Third, the International Monetary Fund, often cited as a catalyst for promoting foreign investment, actually deters multinationals from investment in countries under IMF programs. Even after controlling for the factors that lead countries to seek IMF support, IMF agreements are associated with much lower levels of FDI inflows.

Economic development incentives target individual firms for financial or non-financial benefits to induce capital investment or job creation. Previous studies have found a mixed impact of incentives on economic development, with numerous studies pointing to no impact of incentives on economic growth or job creation. I add to this literature by analyzing two different state economic development incentive programs using the same methods and time-period, allowing for direct comparability. My analysis is the first, "pre-registered" study of incentives, where all of the data collection, design and methodological decisions were made and documented prior to receiving the data. Using a pre-registered matching method design, I estimate the impact of Maryland and Virginia's flagship economic development incentives on job creation. My main finding is that these incentive programs had essentially zero impact on job creation when they are compared to a control group of similar firms. My secondary results find that even after removing firms from the analysis that were subject to "clawbacks" based on non-compliance with the incentive agreement do not improve the overall performance of the program.

AbstractGovernment economic development programmes provide opportunities for firms to leverage financial incentives for business expansion and relocation. This article examines the ability of these incentives to promote employment. Using establishment-level data from the state of Kansas as well as original firm-level survey data, I evaluate the effectiveness of financial incentives in creating jobs through recipient firms. My findings from the establishment-level data indicate that incentive programmes have no discernable impact on firm expansion, measured by job creation. In addition, the survey data suggest that incentive recipients highly recommend this programme to other firms, but few firms actually increased their employment in Kansas because of these incentives; similarly, very few firms would have left the state if they had not benefited from this programme. Thus, incentives have little impact on the relocation or expansion decisions of firms.

Political scientists have examined how domestic politics and the competition for international capital affect the setting of national tax rates. In this paper, I explore how political institutions, specifically the level of democracy, affect firm-level taxation across the world. I argue that electoral competition leads democratic governments to higher levels of taxation on firms. Using a data set on firm tax payments on the foreign affiliates of US multinational corporations from the US Bureau of Economic Analysis, I show that there are large variations within countries on the tax burdens faced by firms that are not explained by national tax rates. I find evidence that the mobility of the specific investment project, the types of spillovers these investments provide to a community, and attributes of the parent firm are all important determinants of taxation. While firm-level factors clearly affect corporate taxation, I argue that democratic institutions limit the offering of tax incentives and generate electoral benefits to policing tax avoidance by multinational corporations. After controlling for parent firm and foreign affiliate-level factors, I find that democratic countries generate as much as 26% more tax revenues from multinational corporations relative to authoritarian countries. Adapted from the source document.

Political scientists have examined how domestic politics and the competition for international capital affect the setting of national tax rates. In this paper, I explore how political institutions, specifically the level of democracy, affect firm-level taxation across the world. I argue that electoral competition leads democratic governments to higher levels of taxation of firms. Using a data set on firm tax payments on the foreign affiliates of US multinational corporations from the US Bureau of Economic Analysis, I show that there are large variations within countries on the tax burdens faced by firms that are not explained by national tax rates. I find evidence that the mobility of the specific investment project, the types of spillovers these investments provide to a community, and attributes of the parent firm are all important determinants of taxation. While firm-level factors clearly affect corporate taxation, I argue that democratic institutions limit the offering of tax incentives and generate electoral benefits to policing tax avoidance by multinational corporations. After controlling for parent firm and foreign affiliate-level factors, I find that democratic countries generate as much as 26% more tax revenues from multinational corporations relative to authoritarian countries. Adapted from the source document.

The existing literature on the political economy of taxation explores how the mobility of firms affects the ability of governments to tax capital. In this article the author tests the relationship between corporate tax rates and multinational investment decisions in advanced, industrialized economies. He utilizes a time-series cross-sectional general error correction model to explore the impact of corporate taxation rates and foreign direct investment (FDI) inflows in up to 19 Organisation for Economic Co-operation and Development economies from 1980 to 2000. To mitigate potential endogeneity problems, the author's identification strategy takes advantage of delays between the passage of tax reductions and the implementation of these policies. The author finds no relationship between corporate tax rates and flows of foreign direct investment. This finding has implications on the link between globalization and domestic politics. [Reprinted by permission of Sage Publications Inc., copyright holder.]

The existing literature on the political economy of taxation explores how the mobility of firms affects the ability of governments to tax capital. In this article the author tests the relationship between corporate tax rates and multinational investment decisions in advanced, industrialized economies. He utilizes a time-series cross-sectional general error correction model to explore the impact of corporate taxation rates and foreign direct investment (FDI) inflows in up to 19 Organisation for Economic Co-operation and Development economies from 1980 to 2000. To mitigate potential endogeneity problems, the author's identification strategy takes advantage of delays between the passage of tax reductions and the implementation of these policies. The author finds no relationship between corporate tax rates and flows of foreign direct investment. This finding has implications on the link between globalization and domestic politics.