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Infrastructure Endowment and Corporate Income Taxes as Determinants of Foreign Direct Investment in Central and Eastern European Countries

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Author Info
Christian Bellak
Markus Leibrecht
Jože P. Damijan

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Abstract

This paper analyses the importance of taxes on corporate income and production-related tangible infrastructure as determinants of foreign direct investment (FDI) in Central and Eastern European countries (CEECs). We operationalise taxes using effective average tax rates on the bilateral level and employ indices derived from principal component analysis as a proxy for the infrastructure endowment. In the empirical analysis we control for a possible interrelation between taxes and infrastructure as determinants of FDI - an issue usually neglected in the literature. Specifically, a favourable infrastructure endowment may compensate for relatively high taxes. Hence, higher taxes may not deter FDI. The results from our panel econometric analysis of bilateral outward FDI flows of seven home countries in eight CEECs for the 1995-2004 period in an augmented gravity model setting show that (i) both taxes and infrastructure play a role in the location decisions made by multinational enterprises; (ii) telecommunication and transport infrastructure are of special significance to FDI; and (iii) the tax-rate sensitivity of FDI indeed decreases with the level of infrastructure endowment. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Ltd.

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File URL: http://www.blackwell-synergy.com/links/doi/10.1111/j.1467-9701.2008.01144.x
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Article provided by Blackwell Publishing in its journal World Economy.

Volume (Year): 32 (2009)
Issue (Month): 2 (02)
Pages: 267-290
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Handle: RePEc:bla:worlde:v:32:y:2009:i:2:p:267-290

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  2. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August. [Downloadable!] (restricted)
  3. Carstensen, Kai & Toubal, Farid, 2004. "Foreign direct investment in Central and Eastern European countries: a dynamic panel analysis," Journal of Comparative Economics, Elsevier, vol. 32(1), pages 3-22, March. [Downloadable!] (restricted)
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  4. Mutti, John & Grubert, Harry, 2004. "Empirical asymmetries in foreign direct investment and taxation," Journal of International Economics, Elsevier, vol. 62(2), pages 337-358, March. [Downloadable!] (restricted)
  5. Agnès Bénassy-Quéré & Maylis Coupet & Thierry Mayer, 2007. "Institutional Determinants of Foreign Direct Investment," The World Economy, Blackwell Publishing, vol. 30(5), pages 764-782, 05. [Downloadable!] (restricted)
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  6. Michael Devereux & Rachel Griffith, 1998. "The taxation of discrete investment choices," IFS Working Papers W98/16, Institute for Fiscal Studies. [Downloadable!]
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  7. Smarzynska, Beata & Spartareanu, Mariana, 2004. "Do foreign investors care about labor market regulations?," Policy Research Working Paper Series 3275, The World Bank. [Downloadable!]
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  8. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany. [Downloadable!]
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  9. Luis Serven & César Calderon, 2004. "The Effects of Infrastructure Development on Growth and income," Econometric Society 2004 Latin American Meetings 173, Econometric Society. [Downloadable!]
  10. David L. Carr & James R. Markusen & Keith E. Maskus, 2001. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," American Economic Review, American Economic Association, vol. 91(3), pages 693-708, June. [Downloadable!] (restricted)
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  11. Egger, Peter & Winner, Hannes, 2005. "Evidence on corruption as an incentive for foreign direct investment," European Journal of Political Economy, Elsevier, vol. 21(4), pages 932-952, December. [Downloadable!] (restricted)
  12. Agnès Bénassy-Quéré & Nicolas Gobalraja & Alain Trannoy, 2007. "Tax and public input competition," Economic Policy, CEPR, CES, MSH, vol. 22, pages 385-430, 04. [Downloadable!] (restricted)
  13. Gramlich, Edward M, 1994. "Infrastructure Investment: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 32(3), pages 1176-96, September. [Downloadable!] (restricted)
  14. Christian Bellak & Markus Leibrecht & Roman Römisch, 2007. "On the appropriate measure of tax burden on foreign direct investment to the CEECs," Applied Economics Letters, Taylor and Francis Journals, vol. 14(8), pages 603-606. [Downloadable!] (restricted)
  15. Timothy Goodspeed & Jorge Martinez-Vazquez & JLi Zhang, 2006. "Are Government Policies More Important Than Taxation in Attracting FDI," International Studies Program Working Paper Series, at AYSPS, GSU paper0614, International Studies Program, Andrew Young School of Policy Studies, Georgia State University. [Downloadable!]
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  16. Demekas, Dimitri G. & Horvath, Balazs & Ribakova, Elina & Wu, Yi, 2007. "Foreign direct investment in European transition economies--The role of policies," Journal of Comparative Economics, Elsevier, vol. 35(2), pages 369-386, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Narula, Rajneesh & Bellak, Christian, 2008. "EU enlargement and consequences for FDI assisted industrial development," UNU-MERIT Working Paper Series 067, United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology. [Downloadable!]
    Other versions:
  2. Lars P. Feld & Jost Henrich Heckemeyer, 2009. "FDI and Taxation: A Meta-Study," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Robert Stehrer & Christian Bellak & Markus Leibrecht, 2008. "The Role of Public Policy in Closing Foreign Direct Investment Gaps: An Empirical Analysis," Working Papers 48, The Vienna Institute for International Economic Studies, wiiw. [Downloadable!]
  4. Vivien Procher, 2009. "Agglomeration Effects and the Location of Foreign Direct Investment – Evidence from French First-time Movers," Ruhr Economic Papers 0100, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen. [Downloadable!]
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