Tax Burden, Institutional Environment and Foreign Direct Investment Flow: From the Perspective of Asymmetric International Tax Competition

Abstract

Abstract The global economic uncertainty is mounting. Governments need to respond with supporting measures for long-term external environment changes as they lower tax burden to attract working capital. Based on the asymmetric tax competition theory, this paper constructs a theoretical model of tax burden, institutional transaction costs and FDI flow. It is found that one country’s strength of institutional environment makes its equilibrium tax rate higher than that of another within certain limits of market size. Based on the data of 199 countries and regions from 2005 to 2018, this paper conducts an empirical analysis, proving that favorable institutional environment narrows the negative impact of tax burden on FDI flow. Moreover, it is showed that in small-market, low-income countries and regions, tax burden level has a larger negative impact on foreign direct investment (FDI) when institutional environment produces no positive impact; in large-market, high-income countries, the negative impact of tax burden is relatively weak but the institutional environment shows largely positive impact. This paper contributes some policy recommendations on how to make use of and improve institutional environment to meet challenges and impacts of the international economic climate.