The Effectiveness of Corporate Tax Reduction in Attracting Investment: The Case of Korea

The effectiveness of corporate tax cuts in Korea has long been debated. The newly elected government of Yoon Seok-yeol announced its economic policy blueprint in June 2022. The reduction of the top corporate tax rate, which was not part of Yoon's campaign promises during the last presidential election, became the signature tax policy of the Yoon administration, and its effectiveness was highly debated. Therefore, the purpose of this study is to analyze the impact of Korea's corporate tax on FDI inflows into Korea. Pooled OLS, Fixed Effects, GLS, PPML, and system GMM are used to analyze the impact of Korea's corporate tax on FDI inflows from 1962 to 2022 for 145 investing countries with bilateral FDI. The analysis did not find a direct effect of corporate tax on FDI flows into Korea; however, the economic size of the home country, bilateral trade volume with the investor country, real effective exchange rate, telecommunications infrastructure, and bilateral free trade agreements (FTAs) were found to have statistically significant effects. While several empirical studies have found a strong negative relationship between a host country's taxes and FDI inflows, this study did not find a direct relationship between taxes and FDI inflows. These results imply that factors other than taxation may be more profound for FDI inflows.