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Are Government Policies More Important Than Taxation in Attracting FDI?

This paper attempts to broaden the existing empirical literature on foreign direct investment by incorporating government expenditure policies, such as investment in infrastructure, and institutional factors that may impact business investment, such as corruption, along with other conventional determinants such as taxes, location factors, and agglomeration effects. We do so in an unbalanced panel data setting, where we use fixed effects to control for country specific idiosyncrasies and also year dummies in some specifications. Our data include both developing and developed countries in different regions of the world. The regression results indicate that better infrastructure and lower taxes attract FDI, with weaker evidence suggesting lower corruption also increases FDI. These results are robust and hold after controlling for fixed country effects, common year effects of FDI, and agglomeration effects. The magnitude of the response of FDI to infrastructure changes is similar to that of taxes in elasticity terms. The results add evidence to previous cross-sectional results and emphasize the importance of a range of government policies in addition to taxation in attracting foreign direct investment.

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File URL: http://icepp.gsu.edu/sites/default/files/documents/icepp/wp/ispwp0702.pdf
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Paper provided by International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University in its series International Center for Public Policy Working Paper Series, at AYSPS, GSU with number paper0702.

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Length: 30 pages
Date of creation: 01 Mar 2007
Date of revision:
Handle: RePEc:ays:ispwps:paper0702
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Web page: http://aysps.gsu.edu/isp/index.html

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  1. Dollar, David & Hallward-Driemeier, Mary & Mengistae, Taye, 2006. "Investment climate and international integration," World Development, Elsevier, vol. 34(9), pages 1498-1516, September.
  2. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February.
  3. Shang-Jin Wei, 2000. "Local Corruption and Global Capital Flows," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 303-354.
  4. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
  5. Jason Cummins & R. Glenn Hubbard, 1995. "The Tax Sensitivity of Foreign Direct Investment: Evidence from Firm-Level Panel Data," NBER Chapters, in: The Effects of Taxation on Multinational Corporations, pages 123-152 National Bureau of Economic Research, Inc.
  6. Dana Hajkova & Giuseppe Nicoletti & Laura Vartia & Kwang-Yeol Yoo, 2006. "Taxation, Business Environment and FDI Location in OECD Countries," OECD Economics Department Working Papers 502, OECD Publishing.
  7. Cheng, Leonard K. & Kwan, Yum K., 2000. "What are the determinants of the location of foreign direct investment? The Chinese experience," Journal of International Economics, Elsevier, vol. 51(2), pages 379-400, August.
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