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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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References

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Citations

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Cited by:
  1. Herrmann, Sabine & Winkler, Adalbert, 2009. "Real convergence, financial markets, and the current account - Emerging Europe versus emerging Asia," The North American Journal of Economics and Finance, Elsevier, vol. 20(2), pages 100-123, August.
  2. Guidi, Francesco & Gupta, Rakesh & Maheshwari, Suneel, 2010. "Weak-form market efficiency and calendar anomalies for Eastern Europe equity markets," MPRA Paper 21984, University Library of Munich, Germany.
  3. Axel Jochem, 2010. "International Financial Competitiveness and Incentives to Foreign Direct Investment," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 230(1), pages 42-58, February.
  4. Lars P. Feld & Jost Henrich Heckemeyer, 2009. "FDI and Taxation: A Meta-Study," CESifo Working Paper Series 2540, CESifo Group Munich.
  5. Sabine Herrmann & Adalbert Winkler, 2009. "Financial markets and the current account: emerging Europe versus emerging Asia," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 145(3), pages 531-550, October.
  6. 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.
  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. Robert E. Lipsey, 2006. "Measuring the Impacts of FDI in Central and Eastern Europe," NBER Working Papers 12808, National Bureau of Economic Research, Inc.
  9. 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.

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