4 treaty-network likely exerts important non-linear effects on a country’s tax revenue. Given the uncertainty about which of these factors drives measured effects, our results need to be interpreted with caution.

Our work adds to a growing, albeit inconclusive, empirical literature on the effect of host country tax regimes and tax treaties on FDI. Egger and others (2006) use propensity score matching and find a negative effect of treaties on outward FDI stocks in the OECD. Lejour (2014) and Barthel and others (2010) find that treaties do increase bilateral FDI, whereas Neumayer (2007) only finds positive effects linked to the conclusion of tax treaties with the United States in middle-income countries. Focusing on Sub-Saharan Africa, our findings suggest that treaties are not associated with increases in foreign direct investment in lowincome economies. Inconclusive empirical findings on the importance of tax treaties for FDI are likely partly a result of the subordinated role of taxation in investor decision making,<sup>8</sup> and of the complexity of FDI decision making in multinational enterprises, which are pursuing different strategies (Carr and others, 2001, Bergstrand and Egger, 2007), with different drivers among those seeking to take over foreign assets as opposed to making greenfield investments (Head and Ries, 2008).

Furthermore, our finding that treaty-conclusion with investment hubs primarily leads to rerouting of investment and income flows, is aligned with earlier work on treaty shopping in the Netherlands and Germany. Using micro-data on Dutch Special Purpose Entities, Weyzig’s (2013) analysis suggests that reduced withholding tax rates on dividend flows are a driver of FDI diversion via the Netherlands. Similarly, Weichenrieder and Mintz (2008) show that an increase in bilateral withholding taxes to and from Germany increases the probability that outward and inward FDI is diverted via a third country. Petkova and others (2018) control for treaty shopping opportunities in their assessment of the relevance of tax treaties for investment when adopting a network approach that builds on van’t Ried and Lejour (2018) and Hong (2018). Noticeably, they find that only the treaties which reduce tax obligations result in higher FDI, thus underscoring the potential importance of treaty shopping in driving treaty effects.

By quantifying the revenue implications of treaty-shopping, we add to recent assessments of the costs associated with tax treaties. Country-specific estimates have, for instance, been provided for Dutch treaties (McGauran, 2013), and the Ukraine (Balabushko et al, 2017). More recently, Jansky and Svidivy (2018) find that costs in terms of revenue foregone amount to up to 0.2 percent of GDP in some countries. Our assessment of the non-negligible cost of tax treaties concluded with investment hubs also raises more general questions on the decision-making processes in countries that are giving up some of their taxing rights. Looking at results of tax treaty negotiations, Hearson (2017) builds on earlier work by Rixen and Schwartz (2009) and Barthel and Neumeyer (2012) and finds that outcomes differ information and bilateral transaction information for Sub-Saharan African countries, our analysis is based on macroeconomic aggregate information, which is available for most countries, but tends to be less accurate when aiming at identifying tax driven effects.

> 8 A recently concluded global investor survey ranks taxation secondary to other factors such as political stability, legal and regulatory environment, and market size (WBG 2017).