FDI motives and the use of tax havens: Evidence from South Korea

Abstract

Despite the recent attention in the media and focus in the academic literature on tax havens and tax mitigation strategies, we know very little about how the use of tax havens relates to a firm’s internationalisation strategy. In this paper, we develop a conceptual model that explains how FDI into tax havens relates to the standard FDI motives identified in the literature. We subsequently use a novel dataset that allows us to empirically investigate how these motives impact upon tax haven FDI in the South Korean context, which has experienced very rapid economic development over the last few decades and is now considered an advanced economy. We find that tax haven FDI is strongly linked to market-seeking and efficiency-seeking FDI, whereas its link with resources-seeking FDI is only found with respect to the most secretive tax haven locations. Furthermore, we find no relationship between technology seeking FDI and tax haven use. We argue that as tax haven use increases over time, the economic proceeds of outward FDI leak out and remain offshore.