Davies, Ronald B.

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Open Access
Estimating the Impact of Time-Invariant Variables on FDI with Fixed Effects
(University of Oregon, Dept of Economics, 2007-05) Davies, Ronald B.; Ionascu, Delia; Kristjánsdóttir, Helga
This paper applies the panel fixed effects with vector decomposition estimator to three FDI datasets to estimate the impact of time-invariant variables on FDI while including fixed effects. We find that the omission of fixed effects significantly biases several of these variables, especially those proxying for trade costs and culture. After including fixed effects, we find that many time-invariant variables indicate the importance of vertical FDI. We also find that by eliminating these biases, the differences across datasets largely disappear. Thus, controversies in the literature that are driven by differences in data sets may be resolved by using this estimation technique.
Open Access
Tax Competition for Heterogeneous Firms with Endogenous Entry: The Case of Heterogeneous Fixed Costs
(University of Oregon. Dept of Economics, 2007-02) Davies, Ronald B.; Eckel, Carsten
This paper models tax competition for mobile firms that are differentiated by the amount of labor needed to cover fixed costs. Because tax competition affects the distribution of firms, it affects both relative equilibrium wages across countries and equilibrium prices. These in turn influence the equilibrium number of firms. From the social planner's perspective, optimal tax rates are harmonized, providing the optimal number of firms, and set such that income is efficiently distributed between private and public consumption. As is common in tax competition models, in the Nash equilibrium tax rates are inefficiently low, yielding underprovision of public goods. Furthermore, there exist a variety of situations in which equilibrium tax rates differ. As a result, too many firms enter the market as governments compete to be the low-tax, high-wage country. This illustrates a new distortion from tax competition and provides an additional benefit from tax harmonization.
Open Access
Tax Competition for Heterogeneous Firms with Endogenous Entry
(University of Oregon, Dept of Economics, 2007-03) Davies, Ronald B.; Eckel, Carsten
This paper models tax competition for mobile firms that are differentiated by the amount of labor needed to cover fixed costs. Because tax competition affects the distribution of firms, it affects both relative equilibrium wages across countries and equilibrium prices. These in turn influence the equilibrium number of firms. From the social planner's perspective, optimal tax rates are harmonized, providing the optimal number of firms, and set such that income is efficiently distributed between private and public consumption. As is common in tax competition models, in the Nash equilibrium tax rates are inefficiently low, yielding underprovision of public goods. Furthermore, there exist a variety of situations in which equilibrium tax rates differ. As a result, too many firms enter the market as governments compete to be the low-tax, high-wage country. This illustrates a new distortion from tax competition and provides an additional benefit from tax harmonization.
Open Access
Adaptive Learning with a Unit Root: An Application to the Current Account
(University of Oregon, Dept of Economics, 2006-07-31) Davies, Ronald B.; Shea, Paul, 1977-
This paper develops a simple two-country, two-good model of international trade and borrowing that suppresses all previous sources of current account dynamics. Under rational expectations, international debt follows a random walk. Under adaptive learning however, international debt behaves like either a stationary or an explosive process. Whether debt converges or diverges depends on the model’s exact specification and the specific learning algorithm that agents employ. When debt diverges, a financial crisis eventually occurs to ensure that the model’s transversality condition holds. Such a financial crisis causes an abrupt decrease in the debtor country’s consumption and utility.
Open Access
Tax Competition for International Producers and the Mode of Foreign Market Entry
(University of Oregon, Dept of Economics, 2003-04-10) Davies, Ronald B.; Egger, Hartmut; Egger, Peter
This paper studies non-cooperative tax competition between two countries for an international producer. The international producer chooses where to locate its headquarters and whether to serve the overseas market through exports or foreign direct investment (FDI). We show that, in the absence of tax competition, the international firm may choose FDI even though this has welfare costs from a global point of view. With tax competition, the host country can use its tax rate to enforce exporting instead of FDI, thereby leading to a Nash equilibrium in the tax setting game which is associated with higher world welfare than the no-tax situation. Thus, because of the effect on entry mode, tax competition provides heretofore unexplored benefits.
Open Access
Fixed Costs, Foreign Direct Investment, and Gravity with Zeros
(University of Oregon, Dept of Economics, 2006-06) Davies, Ronald B.; Kristjánsdóttir, Helga
Fixed costs play a crucial role in current models of foreign direct investment (FDI), yet they are almost entirely ignored in empirical treatments of FDI. We fill this gap by using a 1989-2001 panel of FDI flows into Iceland to examine the determinants of fixed costs for multinational firms and how these influence aggregate patterns of investment. Our additions to research in the field include usage of several natural resource variables, and the analysis of data on initial entry of FDI into a developed country. We use Heckman two step procedure, which allows us to account for fixed costs and their impact on estimation. Taken together, we find that the standard OLS approach to the data incorrectly links the quantity of FDI to source country variables while in fact most of their role is in determining whether FDI takes place at all.
Open Access
Cooperation in Environmental Policy: A Spatial Approach
(University of Oregon, Dept of Economics, 2006-07) Davies, Ronald B.; Naughton, Helen T. (Helen Tammela), 1976-
Inefficient competition in emissions taxes creates benefits from international cooperation. In the presence of cross-border pollution, proximate (neighboring) countries may have greater incentives to cooperate than distant ones as illustrated by a model of tax competition for mobile capital. Spatial econometrics is used to estimate participation in 37 international environmental treaties. Data on 41 countries from 1980-1999 reveal evidence of increased cooperation among proximate countries. Furthermore, the results indicate that FDI usually increases treaty participation. We also find that both OECD and non-OECD countries respond positively to OECD countries’ participation but the response to non-OECD countries is primarily from similar countries. This suggests that the rich countries may lead others in setting environmental quality.
Open Access
Mandatory Minimum Sentencing, Drug Purity and a Test of Rational Drug Use
(University of Oregon, Dept of Economics, 2003-04-10) Davies, Ronald B.
As of 1987, the Anti-Drug Abuse Act (ADAA) has imposed mandatory minimum sentences for drug traffickers based on the quantity of the drug involved regardless of its purity. Using the STRIDE dataset on drug arrests and a differences-indifferences approach, I find that this led to an increase in cocaine purity of 42% and an increase in heroin purity of 30%. Using data on emergency room visits, I show that the concurrent rise in drug-related ER episodes is due to the rise in the standard deviation of drug purity rather than the increase in average purity. Estimates suggest that the increases in standard deviations at the time of the ADAA translate to increases in cocaine and heroin ER mentions of 15% each. Because these negative outcomes depend only on the standard deviation of purity, this suggests that drug users respond rationally by reducing the quantity consumed in response to anticipated increases in the purity of these drugs. Finally, again using the STRIDE data, I find that the ADAA is associated with an increase in the standard deviation of cocaine purity, implying more cocaine ER mentions.
Open Access
Population Aging, Foreign Direct Investment, and Tax Competition
(University of Oregon, Dept of Economics, 2006-05-25) Davies, Ronald B.; Reed, Robert R. (Robert Ray), 1970-
This paper studies the role of population aging for foreign direct investment and the strategic taxation of capital. Importantly, our theoretical model suggests that the labor market implications of aging differ from the financial market aspects. While population aging may be associated with a lower capital stock in the home country and less foreign direct investment, the effects through the labor market and employment tend to generate larger outbound capital flows. To quantify these aspects, we conduct regression analysis to empirically document how population aging affects FDI. To be specific, we use data on both US inbound and outbound FDI. Notably, the estimates between the US and other developed countries conform quite closely to the predictions of our theory. We conclude by studying the strategic taxation of capital. In particular, we examine this issue in light of the fiscal burden associated with older populations. In contrast to previous work on tax competition, we incorporate that old-age transfer programs are generally funded by labor taxes. In this manner, our framework introduces new insights regarding the incentives for governments to restrict capital outflows since doing so increases the labor income tax base used for intergenerational transfers.
Open Access
Self-Protection: Fragmentation of Headquarter Services and FDI
(University of Oregon, Dept of Economics, 2003-11) Davies, Ronald B.
I develop a simple model in which production of skill-intensive headquarter services are fragmented across borders in order to take advantage of complementarities between types of skilled labor. This setting indicates that FDI tends to come from and go to skill-abundant countries. It also yields an ambiguous effect of FDI on domestic relative wages. If the complementarities between skilled labor types are large enough, then increased FDI increases the wages of both skilled and unskilled labor in the home economy. Thus, this model predicts investment patterns comparable to the horizontal model but requires neither trade barriers nor reductions in home wages.
Open Access
Self-Protection: Antidumping Duties, Collusion and FDI
(University of Oregon, Dept. of Economics, 2003-11) Davies, Ronald B.; Liebman, Benjamin H., 1971-
It is well established that the threat of antidumping duties can help sustain collusion between a foreign firm and its domestic counterpart. However, when the foreign firm is a multinational, its subsidiary will fight against a new duty, potentially making this threat hollow and collusion less likely. We show that the multinational may therefore choose to submit to a tariff even under collusion since evidence indicates that duties are more difficult to remove than initiate. In this way, it is possible to obtain a greater degree of commitment, although it comes at a cost. Nevertheless, we show that this can be a more profitable strategy than those previously explored. In fact, we find several cases where subsidiaries of multinational firms have indeed filed for protection from their own parents.
Open Access
Fragmentation of Headquarter Services and FDI
(University of Oregon, Dept of Economics, 2003-09) Davies, Ronald B.
I develop a simple model in which production of skill-intensive headquarter services are fragmented across borders in order to take advantage of complementarities between types of skilled labor. This setting indicates that FDI tends to come from and go to skill-abundant countries. It also yields an ambiguous effect of FDI on domestic relative wages. If the complementarities between skilled labor types are large enough, then increased FDI increases the wages of both skilled and unskilled labor in the home economy. Thus, this model predicts investment patterns comparable to the horizontal model but requires neither trade barriers nor reductions in home wages.
Open Access
Tax Treaties, Renegotiations, and Foreign Direct Investment
(University of Oregon, Dept. of Economics, 2003-06-10) Davies, Ronald B.
Bilateral tax treaties are an important method of international tax cooperation. I survey the existing literature on these agreements, highlighting the differences between the standard view that treaties increase foreign direct investment and the empirical evidence that finds no such effect. I also provide new empirical results on the impact of renegotiations on foreign direct investment. I find that, comparable to other empirical studies on tax treaties, renegotiations have no robust positive impact on FDI.
Open Access
Estimating The Knowledge-Capital Model of the Multinational Enterprise: Comment
(University of Oregon, Dept. of Economics, 2002-03-01) Blonigen, Bruce A.; Davies, Ronald B.; Head, Keith
No abstract was submitted.
Open Access
Hunting High and Low for Vertical FDI
(University of Oregon, Dept. of Economics, 2002-08-01) Davies, Ronald B.
Recently the two dominant models of foreign direct investment (FDI), the horizontal and vertical models, have been synthesized into the knowledge capital (KK) model. Empirical tests, however, have found that the horizontal model cannot be rejected in favor of the KK model. This paper suggests that this is because the empirical specifications used do not allow the vertical aspects of FDI to manifest themselves. By extending the specification, I find evidence of vertical FDI. In particular, when I use the stock of FDI as my measure of FDI activity I can reject the horizontal model in favor of the KK model and identify countries for which FDI is dominated by vertical investment.
Open Access
The OECD Model Tax Treaty: Tax Competition and Two-Way Capital
(University of Oregon, Dept. of Economics, 2002-01-01) Davies, Ronald B.
Model tax treaties do not require tax rate coordination, but do call for either credits or exemptions when calculating a multinational’s domestic taxes. This contradicts recent models with a single capital exporter where deductions are most efficient. I incorporate the fact that many nations import and export capital. With symmetric countries, credits by both is the only treaty equilibrium, resulting in Pareto optimal effective tax rates which weakly dominate the non-treaty equilibrium rates. With asymmetric countries, the treaty need not offer improvements without tax harmonization. With harmonization, it is always possible to reach efficient capital allocations while increasing both countries’ welfares only if neither uses deductions.
Open Access
Tax Competition and Foreign Capital
(University of Oregon, Dept. of Economics, 2001-01-01) Davies, Ronald B.; Gresik, Thomas A.
This paper derives welfare equivalence of double taxation rules in a tax competition model with discriminatory home taxes and the ability to finance subsidiary operations with host country capital. For a more general model, we provide sufficient conditions on the number of host sectors and factors that support double-tax-rule equivalence. Examples violating these conditions help identify economic factors under which a home country's has strict preferences over double taxation rules. If the home tax rate can influence host factor prices, the home country weakly prefers deductions over credits as in the pure-home equity financing case.
Open Access
The Effects of Bilateral Tax Treaties on U.S. FDI Activity
(University of Oregon, Dept. of Economics, 2001-01-01) Blonigen, Bruce A.; Davies, Ronald B.
The effects of bilateral tax treaties on FDI activity have been unexplored, despite significant ongoing activities by countries to negotiate and ratify these treaties. This paper estimates the impact of bilateral tax treaties using both U.S. inbound and outbound FDI over the period 1966-1992. Robust to a wide variety of alternative specifications, we find no evidence that bilateral tax treaties increase FDI activity, contrary to OECD-stated goals for such treaties. In fact, our estimates suggest that for our sample there may instead be economically and statistically significant negative effects of new bilateral tax treaties on U.S. outbound activity to the tax treaty partner country. These findings are consistent with claims that tax treaties are not intended to improve capital flows, but rather to reduce tax evasion through transfer pricing practices or otherwise.
Open Access
Do Bilateral Tax Treaties Promote Foreign Investment?
(University of Oregon, Dept. of Economics, 2001-06-01) Blonigen, Bruce A.; Davies, Ronald B.
We explore the impact of bilateral tax treaties on foreign direct investment using data from OECD countries over the period 1982-1992. We find that recent treaty formation does not promote new investment, contrary to the common expectation. For certain specifications we find that treaty formation may actually reduce investment as predicted by arguments suggesting treaties are intended to reduce tax evasion rather than promote foreign investment.
Open Access
Competition in Taxes and Performance Requirements for Foreign Direct Investment
(University of Oregon, Dept. of Economics, 2001-06-01) Davies, Ronald B.; Ellis, Christopher J.
Tax incentives offered to attract firms engaged in foreign direct investment are often tied to performance requirements such as domestic content restrictions. The tax competition literature has repeatedly shown that competition between municipalities for mobile firms tends to drive taxes to low levels. One would expect a comparable result for burdensome performance requirements. Despite this, the evidence suggests that while taxes have indeed been driven down, performance requirements are as popular as ever. We explain this seeming conundrum by showing that in the presence of spillovers, binding performance requirements can act as a coordination device for firms. In equilibrium, municipalities choose performance requirements which maximize joint surplus from investment. Competition between municipalities then transfers this surplus to firms via tax subsidies.