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Fiscal Incentives, European Integration and the Location of Foreign Direct Investment

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  • Nigel Pain

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Abstract

Foreign direct investment in the European Economic Area (EEA) has grown rapidly in recent years. This paper tests for structural change in the geographical and industrial pattern of FDI in Europe using a panel data set on outward investment by German companies in the EEA since 1980. There is evidence of significant structural change since 1990, with nearly all locations and industries seeing a higher level of cross-border investment than might have been expected. We also investigate the scope for national governments to affect location choice through the use of fiscal instruments such as corporation taxes, investment in infrastructure and other forms of development grants and subsidies. The findings are mixed. Some measures, such as tax competitiveness, appear important but are sensitive to the specification of the model. However the level of government fixed investment expenditure relative to that in other economies is found to have a significant positive impact, particularly in locations with less need for EU structural funds. Although the direct marginal impact appears relatively small, an additional finding of significant agglomeration forces suggests that fiscal policies could still have a permanent influence on the location of economic activities.

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Bibliographic Info

Paper provided by National Institute of Economic and Social Research in its series NIESR Discussion Papers with number 147.

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Date of creation: Mar 2002
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Handle: RePEc:nsr:niesrd:147

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Cited by:
  1. Sebald,Alexander C. & Neubourg,Chris,de, 2003. "Paying for Pensions and Other Public Expenditures: Overtaxing our Children?," Research Memorandum 062, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  2. James Banks & Carl Emmerson, 2000. "Public and private pension spending: principles, practice and the need for reform," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 1-63, March.
  3. Kamil Dybczak, 2006. "Generational Accounts in the Czech Republic," Working Papers 2006/2, Czech National Bank, Research Department.
  4. Alan J. Auerbach, 2003. "Fiscal Policy, Past and Present," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 75-138.
  5. Kotlikoff, Laurence J., 2002. "Generational policy," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 27, pages 1873-1932 Elsevier.
  6. Alan J. Auerbach, 2002. "Is there a role for discretionary fiscal policy?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 109-150.
  7. Eich, Frank, 2010. "Who will pay? Inter-generational transfers and public sector pensions," EconStor Preprints 54558, ZBW - German National Library of Economics.
  8. Conesa, Juan Carlos & Garriga, Carlos, 2013. "Intertemporal discounting and policy selection," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 165-180.
  9. Carlos Garriga & Juan Carlos Conesa, 2008. "Generational Policy and the Measurement of Tax Incidence," 2008 Meeting Papers 977, Society for Economic Dynamics.

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