Introduction
Graeme Leach is Chief Economist and Director of Policy at the Institute of Directors, which he joined in August 1998. He is also visiting professor of economic policy at the University of Lincoln.
A frequent conference speaker and media commentator on the UK and global economy, in recent years he has spoken at conferences in the US, Canada, China, Germany, Italy, France, Spain, Sweden, Ireland, Belgium, Greece, Taiwan, and Zimbabwe.
In 2006 he was appointed to the Conservative Party’s Commission for Tax reform.
Prior to joining the IoD he was economics director at the Henley Centre, analyzing future economic and social change. This included editorship of The Henley Centre’s UK economic forecasts, global macroeconomic outlook and consumer and leisure futures services. As part of this consulting, he has recently produced Tomorrow’s Work, a Report Into the Future of the Way We Work, and is currently researching for a forthcoming book entitled The Future of the West.
In 1998 he was awarded the WPP Atticus Award for original published thinking on futures issues.
Previously, Graeme worked as economic adviser to the Scottish Provident Investment Group, and as a senior economic consultant with Pieda.
Taxation and FDI
The burden of corporate taxation obviously influences the volume and location of foreign direct investment (FDI) for the simple reason that it determines after tax returns from investment. In a globalize world economy with footloose investment, multinational enterprises have the capacity to shift their location and/or taxable income across borders. There is also an asymmetry to the impact of taxation and FDI. Small differences in the tax burden may have little or no impact on FDI as the location decision is based on a number of factors and a small discrepancy in one area is unlikely to swing the location decision. In contrast, a large divide in the tax burden can become the tipping point issue, elbowing aside other influences. Even where a country had a significant advantage in tax competitiveness, which has then eroded, it may still lead to relocations. An example of this would be where a country was traditionally weak say in the competitiveness of its transport and education systems, but had enjoyed a real competitive advantage in its tax system. If the tax advantage falls, even when remaining positive, it could highlight deficiencies in other areas and thereby trigger a relocation elsewhere.
Consequently, a competitive corporate tax system is a necessary but not sufficient condition to attract FDI. Possessing a low tax burden and very little else will not attract FDI. Afghanistan has a zero rate of corporate income tax but is clearly not in receipt of massive private sector investment. The UAE, in comparison, also has a zero rate of corporate income tax which when combined with other influences has achieved huge inward FDI.
The Organisation for Economic Co-operation and Development (OECD) has recently stated that: “there is a broad recognition that international tax competition is increasing and that what may have been regarded as a competitive tax burden on business in a given host country at one point in time may no longer be so after rounds of tax rate reductions in other countries.”
So what drives inward and outward FDI and what is the role of corporate taxation in this process? FDI, like competitiveness, is not determined by a single driver. Many factors intervene in this process, such as market size, market growth, proximity to market, access to market, labor supply, transport infrastructure and the quality of the physical infrastructure.
Taxation is but one of many influences on inbound FDI but how important is it in comparison to other primary influences? These are the issues to which we now turn.
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