Are Government Policies More Important Than Taxation in Attracting FDI?
AbstractThis paper attempts to broaden the existing empirical literature on foreign direct investment by incorporating government expenditure policies, such as investment in infrastructure, and institutional factors that may impact business investment, such as corruption, along with other conventional determinants such as taxes, location factors, and agglomeration effects. We do so in an unbalanced panel data setting, where we use fixed effects to control for country specific idiosyncrasies and also year dummies in some specifications. Our data include both developing and developed countries in different regions of the world. The regression results indicate that better infrastructure and lower taxes attract FDI, with weaker evidence suggesting lower corruption also increases FDI. These results are robust and hold after controlling for fixed country effects, common year effects of FDI, and agglomeration effects. The magnitude of the response of FDI to infrastructure changes is similar to that of taxes in elasticity terms. The results add evidence to previous cross-sectional results and emphasize the importance of a range of government policies in addition to taxation in attracting foreign direct investment.
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Bibliographic InfoPaper 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 paper0702.
Length: 30 pages
Date of creation: 01 Mar 2007
Date of revision:
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Web page: http://aysps.gsu.edu/isp/index.html
FDI; government expenditures; tax level and corruption;
Other versions of this item:
- Timothy Goodspeed & Jorge Martinez-Vazquez & JLi Zhang, 2006. "Are Government Policies More Important Than Taxation in Attracting FDI," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0614, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
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