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Does Cancellation of Preferential Tax Policy Reduce Foreign Direct Investment Inflows?
Author(s) -
Luo Zhi,
Wang Chen,
Zhang Xun
Publication year - 2018
Publication title -
china and world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.815
H-Index - 28
eISSN - 1749-124X
pISSN - 1671-2234
DOI - 10.1111/cwe.12263
Subject(s) - foreign direct investment , monetary economics , international economics , investment (military) , china , foreign portfolio investment , tax policy , economics , suspect , business , open ended investment company , return on investment , tax reform , market economy , macroeconomics , production (economics) , politics , political science , law
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.