Li (2006)- Democracy, Autocracy, and Tax Incentives to Foreign Direct Investors- A Cross-National An

Li (2006)- Democracy, Autocracy, and Tax Incentives to Foreign Direct Investors- A Cross-National An

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Democracy, Autocracy, and Tax Incentives to Foreign Direct Investors: A Cross-National Analysis By: Quan Li (2006) Li, Quan. 2006. “Democracy, Autocracy, and Tax Incentives to Foreign Direct Investors: A Cross-National Analysis.” The Journal of Politics. 68(1): 62-74. Abstract: While offering tax incentives to attract FDI has become a global phenomenon and part of economic globalization in the 1990’s, it is also political and controversial. But the political determinants of tax incentive policies have rarely been analyzed. This article fills this gap by making two contributions. First, I offer a theory that explains how political regime type influences tax incentive policy in the cross-national setting. Second, I evaluate the theory with a statistical analysis of 52 developing countries. The findings support my main theoretical expectations. Countries with better rule of law offer lower levels of tax incentives, and the effect is stronger for more democratic countries. In democracies, FDI inflows are negatively associated with the level of incentives. Autocratic regimes maintaining restrictions on foreign entry adopt lower levels of incentives than those w/out restrictions. I discuss the policy implications of these findings. 1. Question/Puzzle: What are the domestic political determinants of FDI tax incentives? 2. Novel Approach: a. New theory as to what “conditions …different types of political regime offer more or less tax incentives.” b. Use new data set to empirically test FOR THE 1 st TIME, the effects of regime on tax incentives 3. Theoretical Perspective: (Neolib?) 4. Theory: Tax Incentives can be viewed as contract between Firms and Host- country governments: 1. Democratic institutions give host-country more bargaining power over firms than autocratic institutions 2. B/c the potential for “contract repudiation” is less in democracies, there is less risk for firms, also giving democracies greater bargaining power a. These two suggest that democracies needn’t offer tax incentives that match autocracies / This is why democracies can lure firms w/ fewer incentives relative to autocracies 5. Methods: a. Ordered Probit w/ “White/Huber robust SE adjusted for clustering over region” 6. Findings:
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a. Greater respect for rule of law and democratic institutions lead to fewer tax incentives b. Greater regional competition leads to greater tax incentives (Race to the Bottom) c. Autocracies do not all act the same / it depends on whether the elite (selectorate?) stand to gain through FDI or not / If so, high levels of incentives will be found 7. Critiques/Questions: a. Does the author really only test a single year, 2001? I can’t figure this out. b.
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Li (2006)- Democracy, Autocracy, and Tax Incentives to Foreign Direct Investors- A Cross-National An

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