Capital Controls, Liberalizations, and Foreign Direct Investment
Affiliate-level evidence indicates that American multinational firms circumvent capital controls by adjusting their reported intrafirm trade, affiliate profitability, and dividend repatriations. As a result, the reported profit impact of local capital controls is comparable to the effect of 24 percent higher corporate tax rates, and affiliates located in countries imposing capital controls are 9.8 percent more likely than other affiliates to remit dividends to parent companies. Multinational affiliates located in countries with capital controls face 5.4 percent higher interest rates on local borrowing than do affiliates of the same parent borrowing locally in countries without capital controls. Together, the costliness of avoidance and higher interest rates raise the cost of capital, significantly reducing the level of foreign direct investment. American affiliates are 13-16 percent smaller in countries with capital controls than they are in comparable countries without capital controls. These effects are reversed when countries liberalize their capital account restrictions
Hines, James R., Jr., co-author. "Capital Controls, Liberalizations, and Foreign Direct Investment." M. A. Desai and C. F. Foley, co-authors. Rev. Fin. Stud. 19, no. 4 (2006): 1433-64.
©2004 by Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
The publisher's final version may be found as Hines, James R., Jr., co-author. "Capital Controls, Liberalizations, and Foreign Direct Investment." M. A. Desai and C. F. Foley, co-authors. Rev. Fin. Stud. 19, no. 4 (2006): 1433-64.