Foreign aid through domestic tax reforms?

Evidence from multinational firm presence in developing countries

The challenge

Multinational firms account for a significant part of resource allocation in the global economy. This is a particularly important issue in developing countries. Multinational firm investment in developing countries can often be associated with growth, however, these firms are often accused of exploiting local markets through resource extraction and the use of sweatshops. While prior research indicates that foreign direct investment (FDI) correlates with GDP at the aggregate level, it is unclear whether developing countries with weak institutions actually benefit from FDI.

Marcel Olbert, Assistant Professor of Accounting at LBS

The intervention

This research aims to provide new evidence on whether major corporate tax policy reforms in the developed world have (positive) spillovers for developing countries in that they spur additional foreign investment by multinational firms. More specifically, the research investigates how multinational firms respond to major corporate income tax cuts in their headquarter’s country and analyses their investment behavior through foreign subsidiaries in developing countries, with a particular focus on Sub-Saharan Africa.

The impact

This research aims to shed light on the fundamental question of how multinational firm investment can benefit the economies of developing countries in Sub-Saharan Africa. Furthermore, it offers insights on an important but unexplored consequence of corporate income tax cuts for corporations in developed countries such as the UK. More broadly, the project investigates the association between the activities of multinational firms and wealth, employment and the quality of infrastructure in developing countries.

Co-authors

  • Jeffrey L. Hoopes, Associate Professor of Accounting, University of North Carolina at Chapel Hill
  • Daniel Klein, PhD Student, Business Economic, University of Mannheim
  • Rebecca Lester, Associate Professor of Accounting, Stanford University

Marcel Olbert is Assistant Professor of Accounting at London Business School. Marcel’s research interests focus on the real effects of corporate taxation and disclosure regulation – examining how multinational businesses respond to incentives that stem from their regulatory and macroeconomic environment.

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