The study examines the links between India’s outward foreign direct investment (OFDI) and possible income-shifting activities by the parent firms. The exercise is undertaken by examining the impact of OFDI on parent firms’ tax payments, profitability, debt, and intangible assets. The study is driven by the observation that nearly 68% of India’s OFDI flows between 2008 and 2020 were directed to offshore financial centers (OFC). The study relies on the Reserve Bank of India’s (RBI) firm-level overseas direct investment data and the Prowess database. We employed the propensity score matching (PSM) technique in combination with the difference-in-difference method to investigate the post-investment effects. Results suggest that overseas investments have resulted in lower payment of corporate taxes, as well as indirect and direct taxes at home. Moderate negative effects were observed in the case of the profitability of the parent firm. On the contrary, OFDI resulted in higher debt levels, particularly for firms investing in OFC destinations. A positive impact on the firm’s intangible assets suggests that income shifting via relocation of intangible assets is not evident. The analysis calls for policies to counter the possible tax leakage at home due to firms investing overseas, especially in OFCs.
AltshulerR., & GrubertH. (2003). Repatriation taxes, repatriation strategies and multinational financial policy. Journal of Public Economics, 87(1), 73–107. https://doi.org/10.1016/S0047-2727(01)00173-6
2.
ArnoldJ. M., & JavorcikB. S. (2009). Gifted kids or pushy parents? Foreign direct investment and plant productivity in Indonesia. Journal of International Economics, 79(1), 42–53. https://doi.org/10.1016/j.jinteco.2009.05.004
3.
BalakrishnanP., PushpangadanK., & BabuM. S. (2000). Trade liberalisation and productivity growth in manufacturing: Evidence from firm-level panel data. Economic & Political Weekly, 35(41), 3679–3682.
4.
BeckerS. O., & IchinoA. (2002). Estimation of average treatment effects based on propensity scores. The Stata Journal: Promoting Communications on Statistics and Stata, 2(4), 358–377. https://doi.org/10.1177/1536867X0200200403
5.
BeerS., MooijR. D., & LiuL. (2019). International corporate tax avoidance: A review of the channels, magnitudes, and blind spots. Journal of Economic Surveys, 34(3), 660–688. https://doi.org/10.1111/joes.12305
6.
BeugelsdijkS., McCannP., & MudambiR. (2010). Introduction: Place, space and organization-economic geography and the multinational enterprise. Journal of Economic Geography, 10(4), 485–493. https://doi.org/10.1093/jeg/lbq018
7.
BlundellR., & DiasM. (2009). Alternative approaches to evaluation in empirical microeconomics. Journal of Human Resources, 44(3), 565–640. https://doi.org/10.3368/jhr.44.3.565
8.
BorinA., & ManciniM. (2016). Foreign direct investment and firm performance: An empirical analysis of Italian firms. Review of World Economics, 152(4), 705–732. https://doi.org/10.1007/s10290-016-0255-z
9.
BuckleyP. J., MunjalS., EnderwickP., & ForsansN. (2016). Do foreign resources assist or impede internationalisation? Evidence from internationalisation of Indian multinational enterprises. International Business Review, 25(1), 130–140. https://doi.org/10.1016/j.ibusrev.2015.04.004
10.
BuettnerT., & WamserG. (2013). Internal debt and multinational profit shifting: Empirical evidence from firm-level panel data. National Tax Journal, 66(1), 63–95. https://doi.org/10.17310/ntj.2013.1.03
11.
CaliendoM., & KopeinigS. (2008). Some practical guidance for the implementation of propensity score matching. Journal of Economic Surveys, 22(1), 31–72. https://doi.org/10.1111/j.1467-6419.2007.00527.x
12.
ChariM., & AcikgozS. (2016). What drives emerging economy firm acquisitions in tax havens? Journal of Business Research, 69(2), 664–671. https://doi.org/10.1016/j.jbusres.2015.08.034
13.
ChawlaI. (2019). Determinants of firms’ initial decision to invest abroad: An application of ‘survival’ analysis to manufacturing firms in India. Emerging Markets Finance and Trade, 55(3), 562–583. https://doi.org/10.1080/1540496X.2018.1447461
14.
ChawlaI. (2022). Benefitting from investment abroad? Evidence from Indian manufacturing. Asia and the Global Economy, 2(1), 100022. https://doi.org/10.1016/j.aglobe.2021.100022
15.
CobhamA., & JanskyP. (2018). Global distribution of revenue loss from corporate tax avoidance: Re-estimation and country results. Journal of International Development, 30(2), 206–232. https://doi.org/10.1002/jid.3348
16.
CozzaC., RabellottiR., & SanfilippoM. (2015). The impact of outward FDI on the performance of Chinese firms. China Economic Review, 36, 42–57. https://doi.org/10.1016/j.chieco.2015.08.008
17.
CristeaA., & NguyenD. (2016). Transfer pricing by multinational firms: New evidence from foreign firm ownerships. American Economic Journal: Economic Policy, 8(3), 170–202. https://doi.org/10.1257/pol.20130407
18.
CrivelliE., de MooijR.,& KeenM. (2016). Base erosion, profit shifting and developing countries. FinanzArchiv, 72(3);268–301.
19.
DaviesR. B., MartinJ., ParentiM., & ToubalF. (2018). Knocking on tax haven’s door: Multinational firms and transfer pricing. Review of Economics and Statistics, 100(1), 120–134. https://doi.org/10.1162/REST_a_00673
20.
DebaereP., LeeH., & LeeJ. (2010). It matters where you go: Outward foreign direct investment and multinational employment growth at home. Journal of Development Economics, 91(2), 301–309. https://doi.org/10.1016/j.jdeveco.2009.07.002
21.
DesaiM. A., FoleyC. F., & HinesJ. R.Jr (2006). The demand for tax haven operations. Journal of Public Economics, 90(3), 513–531. https://doi.org/10.1016/j.jpubeco.2005.04.004
22.
DesaiM. A., FoleyC. F., & HinesJ. R.Jr (2007). Dividend policy inside the multinational firm. Financial Management, 36(1), 5–26. https://doi.org/10.2139/ssrn.317040
23.
DharmapalaD. (2008). What problems and opportunities are created by tax havens? Oxford Review of Economic Policy, 24(4), 661–679. https://doi.org/10.1093/oxrep/grn031
24.
DischingerM., & RiedelN. (2011). Corporate taxes and the location of intangible assets within multinational firms. Journal of Public Economics, 95(7-8), 691–707. https://doi.org/10.1016/j.jpubeco.2010.12.002
25.
DriffieldN., JonesC., KimJ. Y., & TemouriY. (2021). FDI motives and the use of tax havens: Evidence from South Korea. Journal of Business Research, 135, 644–662. https://doi.org/10.1016/j.jbusres.2021.06.061
26.
EngelD., & ProcherV. (2013). Home firm performance after foreign investments and divestitures. The World Economy, 36(12), 478–1493. https://doi.org/10.1111/twec.12068
27.
FeldsteinM. (1994). Taxes, leverage, and the national return on outbound foreign direct investment (NBER Working Paper No. 4689). National Bureau of Economic Research. https://www.nber.org/papers/w4689
28.
FlaaenA. (2017). The role of transfer prices in profit-shifting by U.S. multinational firms: Evidence from the 2004 Homeland Investment Act. Finance and Economics Discussion Series, 2017(55), 1–40. https://doi.org/10.17016/feds.2017.055
29.
FossN. J., MudambiR., & MurtinuS. (2019). Taxing the multinational enterprise: On the forced redesign of global value chains and other inefficiencies. Journal of International Business Studies, 50(9), 1644–1655. https://doi.org/10.1057/s41267-018-0159-3
30.
FuestC., HebousS., & RiedelN. (2011). International debt shifting and multinational firms in developing economies. Economics Letters, 113(2), 135–138. https://doi.org/10.1016/j.econlet.2011.06.012
31.
GasparenieneL., KliestikT., SivickieneR., RemeikieneR., & EndrijaitisM. (2022). Impact of foreign direct investment on tax revenue: The case of the European Union. Journal of Competitiveness, 14(1), 43–60. https://doi.org/10.7441/joc.2022.01.03
32.
GirmaS., & MaemirH. (2021). Joint effects of exporting and outward FDI on firm-level capital investment in India. Review of Development Economics, 26(1), 606–624. https://doi.org/10.1111/rode.12827
HeinrichC., MaffioliA., & VázquezG. (2010). A primer for applying propensity-score matching(Technical Notes No. IDB-TN-161). Office of Strategic Planning and Development Effectiveness, Inter-American Development Bank. https://publications.iadb.org/en/publications/english/viewer/A-Primer-for-Applying-Propensity-Score-Matching.pdf
35.
HelpmanE., MelitzM., & YeapleS. (2004). Export versus FDI with heterogeneous firms. American Economic Review, 94(1), 300–316. https://doi.org/10.1257/000282804322970814
36.
HerzerD., & SchrootenM. (2008). Outward FDI and domestic investment in two industrialized countries. Economics Letters, 99(1), 139–143. https://doi.org/10.1016/j.econlet.2007.06.014
37.
HongJ., ZhouC., WuY., WangR., & MarinovaD. (2019). Technology gap, reverse technology spillover and domestic innovation performance in outward foreign direct investment: Evidence from China. China & World Economy, 27(2), 1–23. https://doi.org/10.1111/cwe.12272
38.
HuizingaH., VogetJ., & WagnerW. (2009). International taxation and takeover premiums in cross-border M&As(Working Paper 08/26). Oxford University Center for Business Taxation. https://core.ac.uk/reader/288286340
39.
IMF. (2000). Offshore financial centers: IMF background paper. IMF. https://www.imf.org/external/np/mae/oshore/2000/eng/back.htm
40.
JanskýP., & PratsA. (2015). International profit-shifting out of developing countries and the role of tax havens. Developmental Policy Review, 33(3), 271–292. https://doi.org/10.1111/dpr.12113
41.
JohannesenN., TorslovT., & WierL. (2020). Are less developed countries more exposed to multinational tax avoidance? Method and evidence from micro-data. World Bank Economic Review, 34(3), 790–809. https://doi.org/10.1093/wber/lhz002
42.
JonesC., & TemouriY. (2016). The determinants of tax haven FDI. Journal of World Business, 51(2), 237–250. https://doi.org/10.1016/j.jwb.2015.09.001
43.
JosephR. K. (2019). Outward FDI from India: Review of policy and emerging trends(Working Paper No. 214). Institute for Studies in Industrial Development. http://isid.org.in/wp-content/uploads/2020/04/WP214.pdf
44.
KhanH. R. (2012). Outward Indian FDI—recent trends & emerging issues. Keynote address delivered at Bombay Chamber of Commerce & Industry. https://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/OV27022012.pdf
45.
KnoerichJ. (2017). How does outward foreign direct investment contribute to economic development in less advanced home countries? Oxford Development Studies, 45(4), 443–459. https://doi.org/10.1080/13600818.2017.1283009.
46.
KumarN. (2007). Emerging TNCs: Trends, patterns and determinants of outward FDI by Indian enterprises. Transnational Corporations, 16(1), 1–26. https://unctad.org/system/files/official-document/iteiit20071_en.pdf
47.
LeuvenE., & SianesiB. (2003). PSMATCH2: Stata module to perform full Mahalanobis and propensity score matching, common support graphing, and covariate imbalance testing. Statistical Software Components S432001, Boston College Department of Economics. Ideas.repec.org.http://ideas.repec.org/c/boc/bocode/s432001.html
48.
LevinsohnJ., & PetrinA. (2003). Estimating production functions using inputs to control for unobservables. Review of Economic Studies, 70(2), 317–341. https://doi.org/10.1111/1467-937X.00246
49.
LiuL., Schmidt-EisenlhorT., & GuoD. (2017). International transfer pricing and tax avoidance: Evidence from linked tax-trade statistics in the UK(Oxford Centre for Business Taxation Working Paper 17/15). Oxford University Centre for Business Taxation. https://oxfordtax.sbs.ox.ac.uk/files/wp17-15pdf
50.
LuoY., & TungR. (2007). International expansion of emerging market enterprises: A springboard perspective. Journal of International Business Studies, 38(4), 481–498. https://doi.org/10.1057/palgrave.jibs.8400275
51.
MukundhanK. V., SahasranamamS., & CordeiroJ. J. (2019). Corporate investments in tax havens: Evidence from India. Asian Business Management, 18(5), 360–388. https://doi.org/10.1057/s41291-019-00086-y
52.
MunjalS., BhasinN., NandrajogD., & KunduS. (2022). Examining the evolution of emerging market multinational enterprises’ competitive advantages: Evidence from India. Journal of Business Research, 145, 732–744. https://doi.org/10.1016/j.jbusres.2022.03.027
53.
NavarettiG., & CastellaniD. (2008). Do Italian firms improve their performance at home by investing abroad? In BrakmanS. & GarretsenH. (Eds.), Foreign direct investment and the multinational enterprise. The MIT Press. https://doi.org/10.7551/mitpress/9780262026451.001.0001
54.
NingL., & SutherlandD. (2012). Internationalization of China’s private-sector MNEs: An analysis of the motivations for foreign affiliate formation. Thunderbird International Business Review, 54(2), 169–182. https://doi.org/10.1002/tie.21449
55.
Padilla-PerezR., & Gomes NogueiraC. (2016). Outward FDI from small developing economies: Firm-level strategies and home-country effects. International Journal of Emerging Markets, 11(4), 693–714. https://doi.org/10.1108/IJoEM-11-2015-0236
56.
PadmajaM., & SasidharanS. (2020). Financing constraints and exports: Evidence from India. Journal of Economics and Finance, 45(1), 118–145. https://doi.org/10.1007/s12197-020-09532-6
57.
PradhanJ. P. (2017). Indian outward FDI: A review of recent developments. Transnational Corporations, 24(2), 43–70. https://unctad.org/system/files/official-document/diaeia2017d3a2_en.pdf
58.
ReddyK., SasidharanS., & DoytchN. (2022). Outward foreign direct investment and domestic innovation efforts: Evidence from India. Journal of Economics and Business, 122, 106084. https://doi.org/10.1016/j.jeconbus.2022.106084
59.
RosenbaumP., & RubinD. (1983). The central role of the propensity score in observational studies for causal effects. Biometrika, 70(1), 41–55. https://doi.org/10.1093/biomet/70.1.41
60.
RoyI., & NarayananK. (2019). Outward FDI from India and its impact on the performance of firms in the home country. Journal of Asia Business Studies, 13(1), 1–32. https://doi.org/10.1108/JABS-05-2017-0063
61.
SeabrookeL., & WiganD. (2014). Global wealth chains in the international political economy. Review of International Political Economy, 21(1), 257–263. https://doi.org/10.1080/09692290.2013.872691
62.
SertiF., & TomasiC. (2008). Self-selection and post-entry effects of exports: Evidence from Italian manufacturing firms. Review of World Economics, 144(4), 660–694. https://doi.org/10.1007/s10290-008-0165-9%20
63.
SmithJ. A., & ToddP. (2005). Rejoinder. Journal of Econometrics, 125(1–2), 365–375. https://doi.org/10.1016/j.jeconom.2004.04.013
64.
SrivastavaV. (1996). Liberalization, productivity, and competition. Oxford University Press.
SvenssonR. (1996). Effects of overseas production on home country exports: Evidence based on Swedish multinationals. Weltwirtschaftliches Archiv, 132(2), 304–329. https://doi.org/10.1007/BF02707809
67.
Tax Justice Network. (2021). The state of tax justice 2021. https://taxjustice.net/reports/the-state-of-tax-justice-2021/
68.
TaylorG., RichardsonG., & TaplinR. (2014). Determinants of tax haven utilization: Evidence from Australian firms. Accounting and Finance, 55(2), 545–574. https://doi.org/10.1111/acfi.12064
69.
TopalovaP., & KhandelwalA. (2011). Trade liberalization and firm productivity: The case of India. Review of Economics and Statistics, 93(3), 995–1009. https://doi.org/10.1162/REST_a_00095
70.
TorslovT., WierL., & ZucmanG. (2022). The missing profits of nations. The Review of Economic Studies, 90(3), 1499–1534. https://doi.org/10.1093/restud/rdac049
71.
TranA., & XuW. (2021). A study of cross-border profit shifting channels, tax, and transfer policy institute(TTPI Working Paper-18/2021). Tax and Transfer Policy Institute. https://t.ly/BovL2
72.
UNCTAD. (2015). World investment report. United Nations. https://unctad.org/system/files/official-document/wir2015_en.pdf
73.
UNCTAD. (2021). World investment report. United Nations. https://unctad.org/publication/world-investment-report-2021
74.
UNCTAD. (2022). World investment report. United Nations. https://unctad.org/publication/world-investment-report-2022
75.
VogetJ. (2011). Relocation of headquarters and international taxation. Journal of Public Economics, 95(9), 1067–1081. https://doi.org/10.1016/j.jpubeco.2010.11.019
76.
World Bank Group. (2018). Global Investment Competitiveness Report 2017/2018: Foreign investor perspectives and policy implications. World Bank. https://doi.org/10.1596/978-1-4648-1175-3
77.
ZucmanG. (2013). The missing wealth of nations: Are Europe and the U.S. net debtors or net creditors? Quarterly Journal of Economics, 128(3), 1321–1364. https://doi.org/10.1093/qje/qjt012
Supplementary Material
Please find the following supplemental material available below.
For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.
For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.
