Foreign Aid through Domestic Tax Cuts? Evidence from Multinational Firm Presence in Developing Countries

This paper studies whether corporate tax cuts in developed countries affect economies in the developing world. We focus on one of the most prominent fiscal policies – the corporate income tax regime – and study a major U.K. tax cut as an exogenous shock to foreign investment in Africa. Difference-in-differences estimates show that multinational U.K. firms increase their subsidiary presence in sub-Saharan Africa by 17-24 percent following the 2010 announcement of U.K. tax rate reductions. 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 (10 kilometers) of local U.K.-owned subsidiaries. Our findings imply that, beyond the goal of motivating home country investment, developed countries’ corporate tax cuts have economic impact in developing nations.