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Are Government Policies More Important Than Taxation in Attracting FDI

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Abstract

This paper attempts to broaden the existing empirical literature on foreign direct investment by incorporating government expenditures (both investment in infrastructure and consumption) as well as tax, classical location factors, institutional factors that may hinder business investment (such as corruption), and agglomeration effects. We investigate the determinants of FDI inflows in two unbalanced panel data sets of 47 countries from 1995-2002 and 37 countries from 1996-2002. We use fixed country and year effects and examine different infrastructure measures. The evidence indicates that lower taxes, lower corruption, and better infrastructure attract FDI. Government consumption expenditures negatively impact FDI inflows. The magnitude of the response of FDI to our investment in infrastructure is similar to that of corruption and taxes in elasticity terms.

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File URL: http://icepp.gsu.edu/sites/default/files/documents/icepp/wp/ispwp0614.pdf
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Bibliographic Info

Paper provided by International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University in its series International Center for Public Policy Working Paper Series, at AYSPS, GSU with number paper0614.

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Length: 26 pages
Date of creation: 01 Mar 2006
Date of revision:
Handle: RePEc:ays:ispwps:paper0614

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Keywords: FDI; government expenditures; tax level and corruption;

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  1. Dana Hajkova & Giuseppe Nicoletti & Laura Vartia & Kwang-Yeol Yoo, 2006. "Taxation, Business Environment and FDI Location in OECD Countries," OECD Economics Department Working Papers 502, OECD Publishing.
  2. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," William Davidson Institute Working Papers Series 63, William Davidson Institute at the University of Michigan.
  3. Dollar, David & Hallward-Driemeier, Mary & Mengistae, Taye, 2006. "Investment climate and international integration," World Development, Elsevier, vol. 34(9), pages 1498-1516, September.
  4. Jason Cummins & R. Glenn Hubbard, 1995. "The Tax Sensitivity of Foreign Direct Investment: Evidence from Firm-Level Panel Data," NBER Chapters, in: The Effects of Taxation on Multinational Corporations, pages 123-152 National Bureau of Economic Research, Inc.
  5. Shang-Jin Wei, 2000. "Local Corruption and Global Capital Flows," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 303-354.
  6. 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.
  7. Cheng, Leonard K. & Kwan, Yum K., 2000. "What are the determinants of the location of foreign direct investment? The Chinese experience," Journal of International Economics, Elsevier, vol. 51(2), pages 379-400, August.
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Cited by:
  1. Magdalena RADULESCU & Elena Nolica DRUICA, 2011. "FDIs and investment policy in some European countries after their EU accession. Challenges during the crisis," Romanian Journal of Economics, Institute of National Economy, vol. 33(2(42)), pages 169-183, December.
  2. Oliver Morrissey, . "Investment Provisions in Regional Integration Agreements for Developing Countries," Discussion Papers 08/06, University of Nottingham, CREDIT.
  3. Dhammika Dharmapala & James R. Hines Jr., 2006. "Which Countries Become Tax Havens?," NBER Working Papers 12802, National Bureau of Economic Research, Inc.
  4. A. J. Khadaroo & B. Seetanah, 2010. "Transport infrastructure and foreign direct investment," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(1), pages 103-123.

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