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Foreign direct investment in the enlarged EU: do taxes matter and to what extent? Author info | Abstract | Publisher info | Download info | Related research | Statistics Wolff, Guntram B.
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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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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: 2006Date of revision:
Handle: RePEc:zbw:bubdp1:4249Contact details of provider: Postal: Postfach 10 06 02, 60006 Frankfurt Phone: 0 69 / 95 66 - 34 55 Fax: 0 69 / 95 66 30 77 Email: Web page: http://www.bundesbank.de/ More information through EDIRC
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Keywords: Foreign direct investment FDI corporate taxes sample selection model profit re-allocation Other versions of this item:
Find related papers by JEL classification: E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook F2 - International Economics - - International Factor Movements and International Business F3 - International Economics - - International Finance F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance H2 - Public Economics - - Taxation, Subsidies, and Revenue H8 - Public Economics - - Miscellaneous Issues
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references Cited by : (explanations , Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.)
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