Corporate Tax Policy in Developed Countries and Economic Activity in Africa

Hoopes, J L, Klein, D, Lester, R and Olbert, M (2022) Corporate Tax Policy in Developed Countries and Economic Activity in Africa. Working Paper. Social Sciences Research Network.

Abstract

This paper studies whether tax policies in developed nations affect developing economies through cross-border investments by multinational firms. We study firm investment responses to a major U.K. tax reform that drastically reduced the income tax burden for U.K.-based firms. Our identification strategy compares the investment outcomes of U.K. multinational firms in Africa to those of other multinationals with similar ties to Africa but not subject to the large U.K. tax changes that started in 2009. Difference-in-differences estimates show that U.K. multinational firms increased their subsidiary presence in sub-Saharan Africa by 17-26 percent following the U.K. reform. Exploiting location-specific nighttime luminosity data as well as local data from the African Demographic and Health Surveys, we also document increased economic activity and higher employment rates of African citizens within close proximity of local U.K.-owned subsidiaries. These effects are confirmed using novel data on local wealth. Our findings imply that, beyond the goal of motivating home country investment, developed countries’ corporate tax policies impact developing nations.