Employment And Productivity Effects Of Tax Haven FDI

Using longitudinal data on more than 300,000 Ukrainian firms over period of 1999-2013 representing more than 10,000 acquisitions by foreign investors, this study estimates the extent to which tax haven ownership affects employment and firm productivity in the post-acquisition period. Controlling for a rich set of fixed effects and employing propensity score matching, I find that firms acquired by foreign investors experience boost in employment of 8-30%, labor productivity of 10-16% and total factor productivity of 9-11% relative to firms that stay domestic. The gap is much lower for firms acquired by investors from tax haven countries: focusing on the most conservative specification that controls for firm specific fixed effects and growth trajectories, my results suggest that employment of tax haven acquired firms does not change in the postacquisition period, while productivity improvement ranges from 4 to 5 percent. My findings suggest that the implications of tax havens go beyond the loss of tax revenue and might also include stunted growth of the domestic companies receiving FDI from tax havens.