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Foreign direct investment in the enlarged EU: do taxes matter and to what extent?

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  • Wolff, Guntram B.

Abstract

Foreign direct investment is of increasing importance in the European Union. This paper estimates the effect of taxes on foreign direct investment (FDI) flows and on three sub-components of these flows for the countries of the en- larged European Union. The model in the spirit of gravity equations robustly explains FDI flows between the 25 member states. Sample selection needs to be addressed in the estimation. We show that the different subcomponents of FDI should and indeed do react differently to taxes. After controlling for unobserved country characteristics and common time effects, the top statutory corporate tax rate of both, source and host country, turn insignificant for total FDI and investment into equity. However, high source country taxes clearly increase the probability of firms to re-invest profits abroad and lower the percentage of debt financed FDI. This might reflect profit re-allocation to avoid taxes. Market size factors have the expected signs for total FDI. Non-productivity adjusted wages as determinants of FDI are less robust. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2006,13.

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Date of creation: 2006
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Handle: RePEc:zbw:bubdp1:4249

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Keywords: Foreign direct investment; FDI; corporate taxes; sample selection model; profit re-allocation;

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Citations

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Cited by:
  1. Francesco Guidi & Rakesh Gupta & Suneel Maheshwari, 2011. "Weak-form Market Efficiency and Calendar Anomalies for Eastern Europe Equity Markets," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 10(3), pages 337-389, December.
  2. Sabine Herrmann & Adalbert Winkler, 2008. "Real convergence, financial markets, and the current account – Emerging Europe versus emerging Asia," Occasional Paper Series 88, European Central Bank.
  3. Dumitriu, Ramona & Stefanescu, Razvan, 2008. "Perceptions of the Foreign Direct Investors on the Romanian Business Environment," MPRA Paper 42088, University Library of Munich, Germany, revised 02 Aug 2008.
  4. Feld, Lars P. & Heckemeyer, Jost Henrich, 2008. "FDI and Taxation: A Meta-Study," ZEW Discussion Papers 08-128, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Herrmann, Sabine & Winkler, Adalbert, 2008. "Financial markets and the current account: emerging Europe versus emerging Asia," Discussion Paper Series 1: Economic Studies 2008,05, Deutsche Bundesbank, Research Centre.
  6. Jochem, Axel, 2008. "International financial competitiveness and incentives to foreign direct investment," Discussion Paper Series 1: Economic Studies 2008,29, Deutsche Bundesbank, Research Centre.
  7. Klaus Regling & Servaas Deroose & Reinhard Felke & Paul Kutos, 2010. "The Euro After Its First Decade : Weathering the Financial Storm and Enlarging the Euro Area," Governance Working Papers 22817, East Asian Bureau of Economic Research.
  8. Regling, Klaus & Deroose, Servaas & Felke, Reinhard & Kutos, Paul, 2010. "The Euro After Its First Decade: Weathering the Financial Storm and Enlarging the Euro Area," ADBI Working Papers 205, Asian Development Bank Institute.
  9. Robert E. Lipsey, 2006. "Measuring the Impacts of FDI in Central and Eastern Europe," NBER Working Papers 12808, National Bureau of Economic Research, Inc.

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