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Taxation, Business Environment and FDI Location in OECD Countries

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  • Dana Hajkova
  • Giuseppe Nicoletti
  • Laura Vartia
  • Kwang-Yeol Yoo

Abstract

This paper assesses the importance of taxation on foreign direct investment contributing to the literature in two ways. First, it relates bilateral FDI among OECD countries over the 1990s to a new set of estimates of corporate tax wedges that include many relevant aspects of FDI taxation. Second, it controls for a large set of additional policy and non-policy factors that may affect the attractiveness of a country for foreign investors. Furthermore, the empirical approach is novel in that it focuses on a semi-parametric estimation methodology that accounts for a number of unobserved effects possibly impinging on the choice of investment location by multinational enterprises. Consistent with previous findings, the estimation results suggest that corporate taxation has a non-negligible impact on FDI location choices. However, the results suggest that focusing only on taxation in home and host countries and omitting other policies (such as border policies and labour and product market settings) may lead to a serious overestimation of tax elasticities and their relevance for policy. Fiscalité, environnement des entreprises et localisation des IDE dans les pays OCDE Cette étude évalue l'importance des politiques fiscales pour les investissements directs étrangers (IDE). Il contribue a littérature de deux façons: d'une part, l'étude établit un rapport entre les IDE bilatéraux dans les pays de l'OCDE pendant les années 90 et un nouvel ensemble d'indicateurs de taux effectifs d'imposition des sociétés couvrant plusieurs aspects de la taxation sur les IDE. D?autre part, il contrôle pour un ensemble des politiques économiques et autres facteurs susceptibles d'influencer l'attractivité d'un territoire pour les investisseurs étrangers. En outre, l'approche empirique est originale dans la mesure où elle utilise une méthodologie d'estimation semi-parametrique qui tient compte des effets inobservables affectant le choix de localisation des entreprises multinationales. En ligne avec les conclusions de la littérature, les résultats indiquent que l'imposition des sociétés a des incidences non-négligeables sur les choix de localisation des IDE. Cependant, les résultats indiquent qu'il est possible de sérieusement surestimer les élasticités par rapport aux taxes et leur importance politique en se concentrant seulement sur les impôts dans les pays d'origine et d'accueil des investissements, sans prendre en compte un certain nombre de politiques (telles que les obstacles frontaliers et le fonctionnement du marché du travail et des produits).

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File URL: http://dx.doi.org/10.1787/874058477248
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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 502.

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Date of creation: 24 Jul 2006
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Handle: RePEc:oec:ecoaaa:502-en

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Keywords: panel data; corporate taxation; foreign direct investment; regulation; fiscalité des entreprises; investissement direct étranger; données de panel;

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Cited by:
  1. repec:pts:wpaper:f1 is not listed on IDEAS
  2. 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.
  3. Marcin Piatkowski & Mariusz Jarmuzek, 2008. "Zero Corporate Income Tax in Moldova," IMF Working Papers 08/203, International Monetary Fund.
  4. Andreas Breitenfellner & Jesus Crespo Cuaresma & Peter Mooslechner & Doris Ritzberger-Grünwald, 2008. "The Impact of EU Enlargement in 2004 and 2007 on FDI and Migration Flows Gravity Analysis of Factor Mobility," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 101–120.
  5. 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.
  6. Davide Furceri & Stéphanie Guichard & Elena Rusticelli, 2012. "Medium-Term Determinants Of International Investment Positions: The Role Of Structural Policies," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1250012-1-1.
  7. R. Schoonackers & F. Heylen, 2011. "Fiscal Policy and TFP in the OECD: A Non-Stationary Panel Approach," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/701, Ghent University, Faculty of Economics and Business Administration.
  8. Tehmina S. Khan & John Norregaard, 2007. "Tax Policy," IMF Working Papers 07/274, International Monetary Fund.
  9. Paulo Júlio & Ricardo Pinheiro-Alves & José Tavares, 2011. "FDI and institutional reform in Portugal," GEE Papers 0040, Gabinete de Estratégia e Estudos, Ministério da Economia e da Inovação, revised Sep 2011.
  10. Paulo Júlio & Ricardo Pinheiro–Alves & José Tavares, 2013. "Foreign direct investment and institutional reform: evidence and an application to Portugal," Portuguese Economic Journal, Springer, vol. 12(3), pages 215-250, December.
  11. Timothy Goodspeed & Jorge Martinez-Vazquez & Li Zhang, 2011. "Public Policies and FDI Location: Differences between Developing and Developed Countries," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 67(2), pages 171-191, June.
  12. Thomas Dalsgaard, 2008. "Japan's Corporate Income Tax," IMF Working Papers 08/70, International Monetary Fund.
  13. Kevin S Markle, 2012. "A Comparison of the Tax-motivated Income Shifting of Multinationals in Territorial and Worldwide Countries," Working Papers 1206, Oxford University Centre for Business Taxation.
  14. Hristu-Varsakelis, Dimitrios & Karagianni, Stella & Saraidaris, Anastasios, 2011. "Equilibrium conditions in corporate tax competition and Foreign Direct Investment flows," Economic Modelling, Elsevier, vol. 28(1-2), pages 13-21, January.
  15. Driton Qehaja, 2012. "Fiscal Policy Response to External Crises the Case of Moldova 1998-2010," IMF Working Papers 12/82, International Monetary Fund.

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