Do low corporate income tax rates attract FDI? - Evidence from Central- and East European countries

Fifty six bilateral country relationships combining 7 home countries from the EU and the US, and 8 Central and East European host countries (CEECs) of foreign direct investment (FDI) from 1995-2003 are used in a panel gravity-model setting to estimate the role of taxation as a determinant of FDI. Wh...

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Bibliographic Details
Published in:Applied economics 2009-09, Vol.41 (21), p.2691-2703
Main Authors: Bellak, Christian, Leibrecht, Markus
Format: Article
Language:English
Subjects:
Central Europe
Corporate income tax
Corporate taxation
Eastern Europe
Economic models
Elasticity
Foreign direct investment
Foreign investment
International investment
Investment decision
Studies
Tax competition
Tax rates
Taxation economics
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Summary:Fifty six bilateral country relationships combining 7 home countries from the EU and the US, and 8 Central and East European host countries (CEECs) of foreign direct investment (FDI) from 1995-2003 are used in a panel gravity-model setting to estimate the role of taxation as a determinant of FDI. While gravity variables explain most of the variation of FDI inflows, the bilateral effective average tax rate (beatr) is roughly equally important to other cost-related factors. The semi-elasticity of FDI with respect to taxes is about -4.3. This value is above those of earlier studies in absolute terms and can partly be attributed to using the beatr instead of the statutory tax rate. Our results indicate that tax-lowering strategies of CEEC governments seem to have an important impact on foreign firms location decisions.
ISSN:0003-6846
1466-4283
DOI:10.1080/00036840701320217