Does Corruption Relieve Foreign Investors of the Burden of Taxes and Capital Controls?

Shang-Jin Wei

in International Taxation and Multinational Activity

Published by University of Chicago Press

Published in print March 2001 | ISBN: 9780226341736
Published online February 2013 | e-ISBN: 9780226341750 | DOI:
Does Corruption Relieve Foreign Investors of the Burden of Taxes and Capital Controls?

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A number of studies found that capital controls have a statistically significant and negative effect on inward foreign investment, but a separate strand in the literature sees virtue in corruption. In particular, in an environment with excessive tax, severe capital control, or numerous licensing requirements, bribery allows firms to circumvent these otherwise suffocating regulatory burdens. This argument may be characterized as a theory of “efficient grease payments.” This chapter explores the effects of taxes, capital controls, and corruption on foreign direct investment (FDI). Moreover, it investigates whether corruption provides multinational corporations relief from the taxes and capital controls they face in host countries. Using data over a large number of source-host pairs, it quantifies the importance of a number of economic and non-economic factors that may affect international direct investment. It compares these effects with those of corporate income taxation whenever possible. Most importantly, it examines whether bribery in countries with high tax rates and severe capital controls tends to encourage inward FDI.

Keywords: corruption; taxes; capital controls; foreign direct investment; multinational corporations; bribery; efficient grease payments

Chapter.  5839 words. 

Subjects: International Economics

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