Analysis On Pertinency Between China's Tax Policy And Decision-Making FDI Of Multinational Corporations

The promoting effect of FDI on our economy is becoming more and more important, then three kinds of capital becomes an important component of our economy. Multinational companies have increased the direct investment because of our obvious location advantage, where there is a good proof that China has became the champion of attracting FDI on 17 consecutive years in the developing countries. But with the new corporate income tax law had carried out in 2007 which made two kinds of tax combined into one, and the bad effect on global economy because of America financial crisis, the pace of attracting FDI had slowed down which affect our economy's rapid and health development. We try to study the correlation between the role of host government and attracting FDI in the base of traditional FDI theory, the government of host play the main role through foreign-related taxation policy which can be used to influence investment decision of multinational company.Most of the traditional FDI theory made research on capital-exporting countries or multinational companies that produced a lot of theories, but the research on the role of the host government was very seldom. We try to study the role of the host government, and study the correlation between the change of tax policy and the effect of FDI inflow to improve the current FDI theory. As regarding to the domestic investment, we can find that preferential tax rates and effective tax rates are the main two factors that affect the entrepreneurs to invest, which is the most important variable to investment through theoretical analysis. However, as regarding to the investment between international countries, especially for FDI, the factors that affect FDI inflow will become diverse, and tax only play its role as an important location variable. There are many diverse purposes when multinational companies decide to direct investment, different purposes will have different effects on the government of host country to direct investment.This paper made an empirical research on the correlations between the total FDI and the location choice of FDI and the industry choice of FDI on multinational company according to the results of theoretical analysis, from the view of total FDI, we can find that the effective tax rates and preferential tax on foreign-owned enterprises have important influence of the inflows in FDI, but the effective tax rats of the foreign-owned enterprises play more effects on the inflows of FDI in the long run; from the view of location choice of FDI, the inflows of host FDI was affected by many factors, but effective tax rats of foreign-owned enterprises has different influence on the eastern, central and western regions of China, and the influence of eastern region was smaller but western region was larger, other factors are determined according to location advantage; from the view of industry choice of FDI, economics of scale and profitability are important factors of impacting industry choice of FDI, but profitability plays more effects.In this paper, we put forward relevant policy suggestions for government to select flexible tax policy to keep the attraction of FDI in China from three aspects:the total FDI,the location choice of FDI and the industry choice of FDI, and try to make the external unfavorable factors minimize on attracting FDI in the flexible tax policy of government in China, then make our economy in rapidly, healthy and orderly continued development.