Ronald B. Davies

Estimating The Knowledge-Capital Model of the Multinational Enterprise: Comment

What we term the firm includes three principal assumptions. First, services of knowledge-based and knowledge-generating activities, such as R&D, can be geographically separated from production and supplied to production facilities at low cost. Second, these knowledge-intensive activities are skilled-labor intensive relative to production. These characteristics give rise to vertical multinationals, which fragment production and locate activities according to factor prices and market size. Third, knowledge-based services have a (partial) joint-input characteristic that they can be supplied to additional production facilities at low cost. This characteristic gives rise to horizontal multinationals, which produce the same goods or services in multiple locations. In this paper, we note how this model predicts relationships between affiliate sales and country characteristics. We then subject these predictions to empirical tests.

FDI in space: Spatial autoregressive relationships in foreign direct investment

Abstract There are a number of theoretical reasons why foreign direct investment (FDI) into a host country may depend on the FDI in proximate countries. Such spatial interdependence has been largely ignored by the empirical FDI literature, with only a couple recent papers accounting for such issues in their estimation. This paper conducts a general examination of spatial interactions in empirical FDI models using data on US outbound FDI activity. We find that estimated relationships of traditional determinants of FDI are surprisingly robust to inclusion of terms to capture spatial interdependence, even though such interdependence is estimated to be significant. However, we find that both the traditional determinants of FDI and the estimated spatial interdependence are quite sensitive to the sample of countries one examines.

FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment

Theoretical models of foreign direct investment (FDI) have only recently begun to model the role of third countries, and the empirical FDI literature has almost exclusively examined bilateral FDI data without recognizing the potential interdependence between FDI decisions to alternative host countries. This paper uses spatial econometric techniques to examine the spatial correlation between FDI to alternative (neighboring) regions. The sign of such correlations can provide evidence for or against alternative theories for FDI motivations. Using data on OECD countries from 1980-2000, we find evidence consistent with export platform FDI in Europe.

Tax Treaties and Foreign Direct Investment: Potential versus Performance

Bilateral tax treaties are an important method of international tax cooperation. I survey the existing literature on these agreements, highlighting the differences between the standard view that treaties increase foreign direct investment and the empirical evidence that finds little support for this. I also discuss the key differences in treaty formation between developed countries relative to that between developed and developing nations.

Hunting High and Low for Vertical FDI

Recently the horizontal and vertical models of foreign direct investment (FDI) have been synthesized into the knowledge-capital (KK) model. Empirical tests, however, find that the horizontal model cannot be rejected in favor of the KK model. I suggest this is because the empirical specifications are too restrictive for vertical FDI to manifest itself. Using an alternative specification, I find evidence of vertical FDI. In particular, when I use the stock of FDI I can reject the horizontal model in favor of the knowledge-capital model and identify countries for which FDI is dominated by vertical investment.

Do Bilateral Tax Treaties Promote Foreign Direct Investment

We explore the impact of bilateral tax treaties on foreign direct investment using data from OECD countries over the period 1982-1992. We find that recent treaty formation does not promote new investment, contrary to the common expectation. For certain specifications we find that treaty formation may actually reduce investment as predicted by arguments suggesting treaties are intended to reduce tax evasion rather than promote foreign investment.

The Effect of Tax Treaties on Multinational Firms: New Evidence from Microdata

This paper uses affiliate level data from Swedish multinationals to examine the impact of tax treaties on both overall affiliate sales and the composition of those sales. In line with previous results, we find little evidence for an effect of treaties on the level of total sales. We do, however, find that a tax treaty increases the probability of investment by a firm in a given country. In addition, we find that a treaty reduces exports to the parent but increases imports of intermediate inputs from the parent. This is consistent with treaties increasing the effective host tax. This suggests that tax treaties impact the behavior of multinationals along some dimensions but not along others.

Fixed Costs, Foreign Direct Investment, and Gravity with Zeros

Fixed costs play a crucial role in current models of foreign direct investment (FDI), yet they are almost entirely ignored in empirical treatments of FDI. We fill this gap by using a 1989–2001 panel of FDI flows into Iceland to examine the determinants of fixed costs for multinational firms and how these influence aggregate patterns of investment. Our additions to research in the field include usage of several natural-resource variables, and the analysis of data on initial entry of FDI into a developed country. We use the Heckman two-step procedure, which allows us to account for fixed costs and their impact on estimation. Taken together, we find that the standard OLS approach to the data incorrectly links the quantity of FDI to source-country variables while in fact most of their role is in determining whether FDI takes place at all.

The Effect of FDI on Child Labor

This paper examines the extent to which foreign direct investment (FDI) affects child labor. Using 1995 data for 145 countries, we find that, contrary to common fears, FDI is negatively correlated with child labor. This effect, however, disappears when controlling for per capita income. After doing so, we find no robust effect of either FDI or international trade on child labor. This result is robust to corrections for the endogeneity of FDI, trade, and income. Furthermore, this result is confirmed when using data from earlier years and when using fixed effects. This suggests that the impact of FDI and trade on child labor, if any, is the increases in income they generate.

Tax Competition and Foreign Capital

This paper derives welfare equivalence of double taxation rules in a tax competition model with discriminatory home taxes and the ability to finance subsidiary operations with host country capital. For a more general model, we provide sufficient conditions on the number of host sectors and factors that support double-tax-rule equivalence. Examples violating these conditions help identify economic factors under which a home countrys has strict preferences over double taxation rules. If the home tax rate can influence host factor prices, the home country weakly prefers deductions over credits as in the pure-home equity financing case.