Does Cancellation of Preferential Tax Policy Reduce Foreign Direct Investment Inflows?

19 Pages Posted: 15 Nov 2018

See all articles by Zhi Luo

Zhi Luo

Wuhan University

Chen Wang

Shanghai University of Finance and Economics

Xun Zhang

Beijing Normal University (BNU)

Date Written: November–December 2018

Abstract

In light of recent tax cuts by the US, should China reintroduce a preferential tax policy to attract foreign direct investment? This paper investigates whether China's 2008 tax policy change affected inward foreign direct investment. In contrast to previous studies, we break foreign investment down into suspect and real foreign investment using firm‐level data from 1998 to 2008 and conduct a difference‐in‐difference estimation to determine the effect of the tax policy change on both types of foreign investment and compare these to the effect on domestic investment. The results show that the 2008 tax policy change reduced the amount of suspect foreign investment and its effect on real foreign investment was insignificant, indicating that foreign firms in China are more concerned with the investment environment and economic stability than taxes. Therefore, China should create a regulated business environment instead of readopting supernational treatment for foreign enterprises.

Keywords: foreign direct investment, preferential tax policy, suspect foreign capital

JEL Classification: D24, H54, O18

Suggested Citation

Luo, Zhi and Wang, Chen and Zhang, Xun, Does Cancellation of Preferential Tax Policy Reduce Foreign Direct Investment Inflows? (November–December 2018). China & World Economy, Vol. 26, Issue 6, pp. 97-115, 2018, Available at SSRN: https://ssrn.com/abstract=3284654 or http://dx.doi.org/10.1111/cwe.12263

Zhi Luo (Contact Author)

Wuhan University ( email )

Wuhan
China

Chen Wang

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Xun Zhang

Beijing Normal University (BNU) ( email )

19 Xinjiekou Outer St
Haidian District
Beijing, Beijing 100875
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
171
PlumX Metrics