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Attracting FDI: Are Other Government Policies More Important than Taxation in Attracting FDI?

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  • Timothy J. Goodspeed

    ()
    (Hunter College)

  • Jorge Martinez-Vazquez

    (Georgia State University and Universidad de Vigo)

  • Li Zhang

    (Georgia State University)

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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Bibliographic Info

Paper provided by Hunter College Department of Economics in its series Economics Working Paper Archive at Hunter College with number 414.

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Date of creation: 2006
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Handle: RePEc:htr:hcecon:414

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Keywords: FDI; Infrastructure; Determinants of FDI; Corruption; Taxes;

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References

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  1. Jason G. Cummins & R. Glenn Hubbard, 1994. "The Tax Sensitivity of Foreign Direct Investment: Evidence from Firm-Level Panel Data," NBER Working Papers 4703, National Bureau of Economic Research, Inc.
  2. Dollar, David & Hallward-Driemeier, Mary & Mengistae, Taye, 2006. "Investment climate and international integration," World Development, Elsevier, vol. 34(9), pages 1498-1516, September.
  3. Alan J. Auerbach & Kevin Hassett, 1991. "Taxation and Foreign Direct Investment in the United States: A Reconsideration of the Evidence," NBER Working Papers 3895, National Bureau of Economic Research, Inc.
  4. David W Loree & Stephen E Guisinger, 1995. "Policy and Non-Policy Determinants of U.S. Equity Foreign Direct Investment," Journal of International Business Studies, Palgrave Macmillan, vol. 26(2), pages 281-299, June.
  5. Young, Kan H., 1988. "The Effects of Taxes and Rates of Return on Foreign Direct Investment in the United States," National Tax Journal, National Tax Association, vol. 41(1), pages 109-21, March.
  6. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," NBER Working Papers 6030, National Bureau of Economic Research, Inc.
  7. Michael J. Boskin & William G. Gale, 1987. "New Results on the Effects of Tax Policy on the International Location of Investment," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 201-222 National Bureau of Economic Research, Inc.
  8. 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.
  9. Hines, James R, Jr & Rice, Eric M, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 149-82, February.
  10. James R. Hines Jr., 1993. "Altered States: Taxes and the Location of Foreign Direct Investment in America," NBER Working Papers 4397, National Bureau of Economic Research, Inc.
  11. Sebastian Edwards, 1992. "Capital Flows, Foreign Direct Investment, and Debt-Equity Swaps in Developing Countries," NBER Working Papers 3497, National Bureau of Economic Research, Inc.
  12. Asiedu, Elizabeth, 2002. "On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?," World Development, Elsevier, vol. 30(1), pages 107-119, January.
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Cited by:
  1. Dhammika Dharmapala & James R. Hines Jr., 2006. "Which Countries Become Tax Havens?," NBER Working Papers 12802, National Bureau of Economic Research, Inc.
  2. John Anyanwu, 2011. "Working Paper 136 - Determinants of Foreign Direct Investment Inflows to Africa, 1980-2007," Working Paper Series 327, African Development Bank.

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