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

13 Pages Posted: 20 Apr 2016

See all articles by Shang-Jin Wei

Shang-Jin Wei

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: October 1999

Abstract

Other things being equal, countries with higher tax rates, more corruption, or more restrictions on capital account transactions attract less foreign investment. Taxes and capital controls hinder foreign investment, and bureaucratic corruption adds to those burdens rather than reducing them.

In a sample of 14 source countries making bilateral investments in 45 host countries, Wei finds that taxes, capital controls, and corruption all have large, statistically significant negative effects on foreign investment. Moreover, there is no robust support in the data for the efficient grease hypothesis - that corruption helps attract foreign investment by reducing firms' tax burden and the irritant of capital controls.

This paper - a product of Public Economics, Development Research Group - is part of a larger effort in the group to study effective anticorruption strategies. It will appear as a chapter in a book on taxation and foreign direct investment edited by James Hines Jr. and to be published by the University of Chicago Press for the National Bureau of Economic Research.

Suggested Citation

Wei, Shang-Jin, Does Corruption Relieve Foreign Investors of the Burden of Taxes and Capital Controls? (October 1999). Available at SSRN: https://ssrn.com/abstract=623966

Shang-Jin Wei (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

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New York, NY 10027
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National Bureau of Economic Research (NBER)

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United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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