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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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  • Christian Bellak
  • Markus Leibrecht
  • Joze P. Damijan

Abstract

This paper analyzes 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 operationalize 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. Thus, we posit that there are likely to be interaction effects between taxes and infrastructure as determinants of FDI. Specifically, a favorable 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 7 home in 8 CEE host countries 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.

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File URL: http://www.econ.kuleuven.be/licos/publications/dp/dp193.pdf
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Bibliographic Info

Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 19307.

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Length: 30 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:lic:licosd:19307

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Keywords: Foreign direct investment; transition economies; infrastructure; taxation;

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  1. 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.
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  4. Beata Smarzynska Javorcik & Mariana Spatareanu, 2005. "Do Foreign Investors Care about Labor Market Regulations?," Working Papers Rutgers University, Newark 2005-005, Department of Economics, Rutgers University, Newark.
  5. Peter E. Kennedy, 2005. "Oh No! I Got the Wrong Sign! What Should I Do?," The Journal of Economic Education, Taylor & Francis Journals, vol. 36(1), pages 77-92, January.
  6. Carstensen, Kai & Toubal, Farid, 2004. "Foreign direct investment in Central and Eastern European countries: A dynamic panel analysis," Munich Reprints in Economics 19965, University of Munich, Department of Economics.
  7. Christian Bellak & Markus Leibrecht & Roman Romisch, 2007. "On the appropriate measure of tax burden on foreign direct investment to the CEECs," Applied Economics Letters, Taylor & Francis Journals, vol. 14(8), pages 603-606.
  8. Pavlos Petroulas, 2006. "The Effect of the Euro on Foreign Direct Investment," Working Papers 48, Bank of Greece.
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  10. 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.
  11. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
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  13. 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.
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Cited by:
  1. C. Bellak & M. Leibrecht & R. Stehrer, 2010. "The role of public policy in closing foreign direct investment gaps: an empirical analysis," Empirica, Springer, vol. 37(1), pages 19-46, February.
  2. Jie Zhang, 2013. "Infrastructure, Industrial Productivity and Regional Specialization in China," Keio/Kyoto Joint Global COE Discussion Paper Series 2012-034, Keio/Kyoto Joint Global COE Program.
  3. Lars P. Feld & Jost H. Heckemeyer, 2011. "Fdi And Taxation: A Meta‐Study," Journal of Economic Surveys, Wiley Blackwell, vol. 25(2), pages 233-272, 04.
  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.
  5. Keller, Sara & Schanz, Deborah, 2013. "Tax attractiveness and the location of German-controlled subsidiaries," arqus Discussion Papers in Quantitative Tax Research 142, arqus - Arbeitskreis Quantitative Steuerlehre.
  6. Popovici Oana Cristina & Calin Adrian Cantemir, 2012. "Attractiveness Of Public Policies For Fdi In Central And Eastern European Countries," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 61-67, July.
  7. Christian Bellak & Rajneesh Narula, 2008. "EU enlargement and consequences for FDI assisted industrial development," Economics & Management Discussion Papers em-dp2008-69, Henley Business School, Reading University.
  8. Markus Leibrecht & Aleksandra Riedl, 2012. "Modelling FDI based on a spatially augmented gravity model: Evidence for Central and Eastern European Countries," Working Paper Series in Economics 239, University of Lüneburg, Institute of Economics.
  9. Keller, Sara & Schanz, Deborah, 2013. "Measuring tax attractiveness across countries," arqus Discussion Papers in Quantitative Tax Research 143, arqus - Arbeitskreis Quantitative Steuerlehre.
  10. Markus Leibrecht & Christian Bellak, . "Does the impact of employment protection legislation on FDI differ by skill-intensity of sectors? An empirical investigation," Discussion Papers 09/21, University of Nottingham, GEP.
  11. Hans Pitlik & Margit Schratzenstaller, 2011. "Growth Implications of Structure and Size of Public Sectors," WIFO Working Papers 404, WIFO.
  12. Yuko Kinoshita, 2011. "Sectoral Composition of Foreign Direct Investment and External Vulnerability in Eastern Europe," IMF Working Papers 11/123, International Monetary Fund.
  13. Popovici Oana Cristina, 2012. "Is Taxation Affecting The Attractiveness Of Central And Eastern Europe Countries For Fdi?," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 141-145, March.
  14. Bassem Kahouli & Anis Omri & Anissa Chaibi, 2014. "Environmental Regulations, Trade, and Foreign Direct Investment: Evidence from Gravity Equations," Working Papers 2014-189, Department of Research, Ipag Business School.
  15. Esiyok, Bulent, 2011. "Determinants of foreign direct investment in Turkey: a panel study approach," MPRA Paper 36568, University Library of Munich, Germany.

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