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Taxes and Location of Foreign Direct Investments: an Empirical Analysys for the European Union Countries

  • Roberta De Santis

    (ISAE - Institute for Studies and Economic Analyses)

  • Maria Cristina Mercuri

    (ISAE - Institute for Studies and Economic Analyses)

  • Claudio Vicarelli

    (ISAE - Institute for Studies and Economic Analyses)

This paper aims at verifying the impact of fiscal variables in the multinational firms' localisation choices within the European Union Member States. In particular, the sensitivity of bilateral foreign direct investments towards EU member countries to the receiving country's fiscal characteristics is tested. Among fiscal variables, the empirical analysis shows that FDI inflows in the European Union countries are influenced by the total fiscal wedge on labour more than the corporate tax rate. This suggests that Multinationals, while making their localisation choices, focus their attention on the overall tax and contribution burden more than on single corporate tax rates, which indeed provide only a partial (even though immediate) information. The estimated elasticities of FDI inflows to fiscal variables suggest that a high-taxation country might draw considerable benefits in terms of FDI through a relatively modest tax rate reduction. This means that not necessarily each Member State must switch to very low tax rates (for example those of Ireland) to obtain an optimal combination between costs (associated to the tax rate reduction) and benefits (linked to the tax base enlargement, i.e. larger FDI flows).

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Paper provided by ISTAT - Italian National Institute of Statistics - (Rome, ITALY) in its series ISAE Working Papers with number 24.

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Length: 33 pages
Date of creation: Nov 2001
Date of revision:
Handle: RePEc:isa:wpaper:24
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  13. Roberta De Santis & Claudio Vicarelli, 2001. "Fattori di attrazione degli investimenti diretti esteri nell’Unione Europea: il ruolo del contesto istituzionale e la competitività dell’Italia," Rivista di Politica Economica, SIPI Spa, vol. 91(3), pages 3-32, March.
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  20. Joeri Gorter & A. Parikh, 2000. "How mobile is capital within the European Union?," CPB Research Memorandum 172, CPB Netherlands Bureau for Economic Policy Analysis.
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