The purpose of this paper is to perform a detailed examination of corruption effects on trade based on corruption characteristics known to affect economic exchange within the corruption research field. These characteristics are the level, prevalence, customs location, function and predictability of corruption. The multifaceted corruption impact on trade is empirically examined using a corruption‐augmented gravity equation. The equation is estimated using a Heckman version of a GMM instrumental variable method. Our results provide strong evidence of that import flows vary systematically with the investigated corruption characteristics and enable the identification of channels through which corruption affects international trade. The empirical investigation clearly indicates the need to examine the multifaceted role of corruption to properly assess the trade effects of corruption.
There is stark evidence that many policies which influence firm gains from engaging in FDI (such as tax and trade policies) are targeted by lobbying groups and that corruption can be an important determinant of market attractiveness. The scarce research that exists on firm behaviour, corruption and lobbying shows that these activities can be regarded as alternative, and interdependent, influence forms. This paper provides the novel contribution of investigating how the market infiltration of corruption and lobbying affects the firm's investment decision. We identify the interdependent effects using census data for Swedish manufacturing firms that allows a complete identification of the firm's market selection. Our results reveal that these private–public sector links influence the firm's investment decision differently, as market selection is deterred by corruption and stimulated by lobbying, and that they function as substitutes. We show that the stimulating lobbying effect largely can be attributed to its interdependency with corruption, which suggests that firms are more shielded from corruption in lobbying environments. Further investigation reveals that the corruption and lobbying effects are not always representative of larger firms: The largest firms are undeterred by corruption in markets where lobbying forms an integral part of the business environment and larger firms are not stimulated by lobbying in markets largely void of corruption.
There has been growing concern about multinational enterprises (MNEs) increased use of taxavoidance schemes, enabling them to pay very little tax. MNEs can reduce their tax payments in several ways. For instance, they can shift revenues by overpricing inputs produced in low-tax jurisdictions (transfer pricing), or they can set up favourable internal debt structures to take advantage of differences in interest deductions and interest payments across countries. Such strategic tax-planning activities lead to lost tax revenues in countries with uncompetitive tax systems, and distorted competition vis-a-vis domestic firms that do not have the same possibilities. In response, attempts have been made for international cooperation and coordination of tax laws, strongly initiated by the G20 2012 initiative and the OECD 2013 action plan. 1 Currently, more than a hundred countries collaborate to counteract base erosion and profit shifting (BEPS) by, for example, country-bycountry reporting to mitigate transfer pricing. In addition, several countries have taken unilateral action to restrain MNE cross-border income shifting, typically by restricting interest deductions. 2 The common perception that MNEs engage in strategic tax planning is generally confirmed by research evidence (Devereux, 2006;Heckemeyer & Overesch, 2013;Hines, 1999). There is, however, considerable variation in the empirically quantified magnitudes of tax-planning activities. One challenge is the difficulty in identifying the effects of these activities. Most previous studies have estimated semi-elasticities based on corporate tax-rate differences between home and host country, typically focusing on the impact of tax-rate reductions in the host country. The problem with this method is that it entangles strategic tax planning with the effect a lower corporate tax rate may have on profitability, resulting in an upward bias in the identified profit shifting. In addition, many studies ignore the influence on tax payments of firm-level factors that are not due to strategic tax planning (such as leveraged firms benefiting from interest deductions).In this study, we address these shortcomings. Our approach allows us to detect systematic differences between multinational and domestic firms without relying on changes in corporate tax-rate 1 This action plan involves measures equipping national governments with means to prevent tax erosion and secure that profits are taxed where they are generated by economic activity. 2 For example, Belgium, Germany and Italy have adopted thin capitalisation rules limiting the leverage of multinational firms and other regulations restricting intra-company debt transfers.
In this paper, determinants of bilateral protection levels are empirically identified when controlling for multilateral trade regulation and importing‐country‐specific factors. Strong empirical support is provided of that three bilateral factors are influencing the bilateral protection level. Specifically, a country's protection level on goods from a trade partner is positively affected by the domestic import penetration of goods produced by the trade partner, negatively influenced by the intra‐industry traded share of these imports and positively affected by the trade partner's protection level on domestic goods. Moreover, very high explanatory values are provided in the cross‐section estimations, indicating that these determinants, policy regulations and importer‐specific factors jointly explain almost all of the variation in bilateral protection levels. The results are general in the sense that estimations are performed for a large sample of bilateral trade relations including 22 trade partners that are highly differentiated in terms of country characteristics. The overall results indicate that, to the extent that policy makers can affect bilateral protection levels under multilateral trade regulation, they act on political‐economy rather than economic goals.
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