Tax Enforcement and Foreign Investment by Multinational Corporations : Evidence from Tax Inspectors Without Borders

We investigate whether a commitment to stronger tax enforcement by developing countries helps attract foreign direct investment (FDI) from multinational corporations (MNCs). We hypothesize that tax enforcement aimed at local affiliates of MNCs reduces information asymmetries and monitoring costs within MNCs, which in turn reduces costs of FDI. We test our prediction by examining the effect of the Tax Inspectors Without Borders (TIWB) program on FDI. TIWB is a joint initiative by the OECD and UNDP that helps developing countries audit MNCs. Using a staggered differences-in-differences design, we find that FDI inflows to participating countries significantly increase after TIWB initiation. Consistent with stronger tax enforcement resolving information-related agency costs, we also find the effect is weaker when other external governance mechanisms at the home, host, and home-host country levels are stronger. Our findings have important policy implications and suggest external monitoring by tax authorities affects real investment decisions