Foreign Aid through Domestic Tax Cuts? Evidence from Multinational Firm Presence in Developing Countries

Abstract

This paper studies how corporate tax cuts in developed countries affect economies in the developing world. We focus on one of the most prominent fiscal policies – the corporate income tax regime – and study a major U.K. tax cut as an exogenous shock to foreign investment in Africa. Difference-in-differences estimates show that multinational U.K. firms increase their subsidiary presence in sub-Saharan Africa by 12-24% following the U.K. tax rate reduction after 2009. Exploiting location-specific nighttime luminosity as well as local African survey data from the African Demographic and Health Surveys, we document that these increases in U.K. subsidiary presence are also associated with increased economic activity and higher employment rates of African citizens within close proximity (10km) of local U.K.-owned subsidiaries. Our findings imply that, beyond the goal of motivating home country investment, developed countries’ corporate tax cuts are a channel for economic impact in developing countries.