FDI and Tax haven: A network analysis of productivity effects

Abstract

Multinational Enterprises (MNEs) often use tax havens to benefit from the tax arbitrage opportunities. However, these activities distort the global financial markets and erode national corporate tax bases. These outcomes may adversely impact the level of economic activity and the productivity of the MNEs' home countries. More recently, MNEs have been increasing the dispersion of their tax haven activities to either obscure their tax arbitrage activities or because other tax havens offer different risks/opportunities. However, the home-host bilateral view used to examine the impact of tax havens assumes all such ties are homogenous and fails to capture the effect of this dispersion. By adopting a multilateral perspective and using longitudinal data of over 200 UN member countries between 2001-2012, we capture the differential impact of increasing centrality and prominence of the home country and host country in the offshore OFDI and IFDI network. We argue that increasing the centrality of the host country increases the financial efficiency of its MNEs and positively impacts its productivity. However, such activities appear motivated by capital gains rather than knowledge generation. In contrast, since MNEs use tax havens to park funds and minimize taxes, increasing the centrality of the home country negatively impacts its productivity. Moreover, we find that controlling for financial development attenuates the capital efficiency gains for both home and host country from their ties to tax havens and turns the relationship between ties to tax havens and productivity of home and host country unambiguously negative. We find support for these arguments.