FDI and tax income of Chinese cities: a spatial panel analysis based on data of 221 cities
【Abstract】By building a spatial econometric model based on the geographical distance among the 221 cities in China from 2003 to 2011, this paper examines whether FDI inflow increases the tax reveune of cities in China. It is found that FDI has a negative impact on tax increase, with 1% increase in FDI resulting in 0.31% to 0.37% decrease in tax income. The tax income of a city has a significantly positive corelation with that of the neighboring cities, possibly as a result of the economic policies for attracting foreign investment introduced by local governments such as various tax breaks and tax incentives to improve employment, promote regional GDP growth or boost administrative achievements. While these preferential policies can promote GDP growth, they could inevitably bring about the loss of financial resources of the local governments which may put the local government into “prisoner' s dilemma.” To address this, local governments should coordinate their policies on FDI and manage to promote the tax revenue growth while enhancing the economic development.
【Keywords】 FDI; tax income; spatial econometric model; policy competition;
(Translated by ZHAO Shichen)
. 1 See Eric W.Bond et al.(1986). [^Back]
. 2 Race to the bottom: a phrase to describe by depriving labour, consuming resources and damaging the environment to achieve growth. [^Back]
. 3 By introducing the (n-1) dummy variables in the original equation (n dummy variables will be introduced if there is no intersectional unit present) to represent different element. This is to fulfil the strong hypothesis of various disturbance terms are unrelated to the explanatory variables at different phases. Under this hypothesis, an estimation of individual heterogeneity ui can be reached. [^Back]
Fu, M. China Economic Quarterly (经济学季刊),8(4)(2009).
He, X. & Wang, L. Economic Research Journal (经济研究),(11) (2008).
Luo, Y., Zhu, S.& Chen, Y. et al. China Economic Quarterly (经济学季刊), 7(2) (2008).
Wang, C. China Economic Quarterly (经济学季刊),(1)(2012).
Wang, B. The Journal of Quantitative & Technical Economics (数量经济技术经济研究),(2)(2010).
Yu, Z., Wang M.& Zhang, X. China Economic Quarterly (经济学季刊),10(1) (2010).
Zhong, C. Economic Research Journal(经济研究),(1) (2010).
Zhou, L. & Tao, J. Economic Research Journal(经济研究),(1) (2009).
Anselin L., (1988)“Spatial Econometrics: Methods and Models,”Springer Science & Business Media.
Black D A., Hoyt W H., (1989)“Bidding for Firms,”The American Economic Review, 1249-1256.
Blonigen B A.,Davies R B.,Waddell G R.,et al., (2004)“FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment,”European Economic Review 51 (5) , 1303-1325.
Bond E W.,Samuelson L., (1986)“Tax Holidays as Signals,”The American Economic Review,820-826.
Cheng, L. K.,and Kwan, Y.K., (2000)“What are the Determinants of the Location of Foreign Direct Investment? The Chinese Experience,”Journal of International Economics 51 (2) , 379-400.
Chris Doyle., Sweder Van Wijnbergen., (1994)“Taxation of Foreign Multinationals: A Sequential Bargaining Approach to Tax Holidays,”International Tax and Public Finance 1 (3) , 211-225.
Davies R B., (2005)“State Tax Competition for Foreign Direct Investment: A Winnable War?”Journal of International Economics 67 (2) , 498-512.
Ghinamo M., Panteghini P M., Revelli F., (2010)“FDI Determination and Corporate Taxcompetition in a Volatile World,”International Tax and Public Finance 17 (5) , 532-555.
Keen, M.,and C. Kotsogiannis., (2002)“Does Federalism Lead to Excessively High Taxes?”American Economic Review 92 (1) , 363-370.