Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcast
  • Managing the Future of Work Podcast
  • About Us
  • Book
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Podcasts
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
  • Browse All
    Tax Policy and the Efficiency of US Direct Investment Abroad
    03 Aug 2011Working Paper Summaries

    Tax Policy and the Efficiency of US Direct Investment Abroad

    by Mihir A. Desai, C. Fritz Foley and James R. Hines Jr.
    The tax policy toward multinational firms has come under increased scrutiny with the rise of global activities of firms and concerns that these activities displace activities at home. This scrutiny has raised the question of whether current tax policy inefficiently subsidizes the foreign activities of firms. Mihir A. Desai, C. Fritz Foley, and James R. Hines, Jr. consider this claim by applying the theory of dynamic efficiency to the activities of multinational firms. Specifically, by comparing direct investment abroad with repatriated investment returns over the last sixty years, they conclude that firms are not investing to dynamically inefficient levels, suggesting that current tax policy is not an inefficient subsidy. Key concepts include:
    • U.S. direct investment abroad generated cash flows greater than investment deployed by more than $1 trillion for equity investments from 1982-2010 annually, and $2 trillion for equity and debt investments from 1950-2010. The data suggest that US foreign investment is dynamically efficient.
    LinkedIn
    Email

    Author Abstract

    Deferral of U.S. taxes on foreign source income is commonly characterized as a subsidy to foreign investment, as reflected in its inclusion among "tax expenditures" and occasional calls for its repeal. This paper analyzes the extent to which tax deferral and other policies inefficiently subsidize U.S. direct investment abroad. Investments are dynamically inefficient if they consistently generate fewer returns to investors than they absorb in new investment funds. From 1982-2010, repatriated earnings from foreign affiliates exceeded net capital investments by $1.1 trillion in 2010 dollars; and from 1950-2010, repatriated earnings and net interest from foreign affiliates exceeded net equity investments and loans by $2.1 trillion in 2010 dollars. By either measure, cash flows received from abroad exceeded 160 percent of net investments, implying that foreign investment over these periods was dynamically efficient.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: July 2011
    • HBS Working Paper Number: NBER 17202
    • Faculty Unit(s): Finance
      Trending
        • 23 May 2023
        • Research & Ideas

        Face Value: Do Certain Physical Features Help People Get Ahead?

        • 30 May 2023
        • Research & Ideas

        Can AI Predict Whether Shoppers Would Pick Crest or Colgate?

        • 02 May 2023
        • What Do You Think?

        How Should Artificial Intelligence Be Regulated—if at All?

        • 31 May 2023
        • HBS Case

        From Prison Cell to Nike’s C-Suite: The Journey of Larry Miller

        • 25 Jan 2022
        • Research & Ideas

        More Proof That Money Can Buy Happiness (or a Life with Less Stress)

    Mihir A. Desai
    Mihir A. Desai
    Mizuho Financial Group Professor of Finance
    Contact
    Send an email
    → More Articles
    C. Fritz Foley
    C. Fritz Foley
    André R. Jakurski Professor of Business Administration
    Senior Associate Dean for External Relations
    Contact
    Send an email
    → More Articles
    Find Related Articles
    • Government and Politics
    • Economics

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
    ǁ
    Campus Map
    Harvard Business School Working Knowledge
    Baker Library | Bloomberg Center
    Soldiers Field
    Boston, MA 02163
    Email: Editor-in-Chief
    →Map & Directions
    →More Contact Information
    • Make a Gift
    • Site Map
    • Jobs
    • Harvard University
    • Trademarks
    • Policies
    • Accessibility
    • Digital Accessibility
    Copyright © President & Fellows of Harvard College