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

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  • Florence Hubert
  • Nigel Pain

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 195.

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Date of creation: Mar 2002
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Handle: RePEc:nsr:niesrd:195

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Cited by:
  1. Görg, Holger, 2002. "Fancy a Stay at the 'Hotel California'? Foreign Direct Investment, Taxation and Firing Costs," IZA Discussion Papers 665, Institute for the Study of Labor (IZA).
  2. Holger Görg, 2003. "Foreign direct investment, investment incentives, and firing costs: A disadvantage for "inflexible Europe"?," European Economy Group Working Papers 30, European Economy Group.
  3. Gross, Dominique M. & Ryan, Michael, 2008. "FDI location and size: Does employment protection legislation matter?," Regional Science and Urban Economics, Elsevier, vol. 38(6), pages 590-605, November.
  4. Thomas Jost & Peter Nunnenkamp, 2002. "Bestimmungsgründe deutscher Direktinvestitionen in Entwicklungs- und Reformländern � Hat sich wirklich etwas verändert?," Kiel Working Papers 1124, Kiel Institute for the World Economy.
  5. Holger Görg, 2003. "Fancy a stay at the "Hotel California "?Foreign Direct Investment,Taxation and Exit Costs," DNB Staff Reports (discontinued) 96, Netherlands Central Bank.
  6. Basile, Roberto & Castellani, Davide & Zanfei, Antonello, 2008. "Location choices of multinational firms in Europe: The role of EU cohesion policy," Journal of International Economics, Elsevier, vol. 74(2), pages 328-340, March.

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