Working Papers, Department of Economics, Lund University
Tax differences and foreign direct investment in the EU27
() and Karin Olofsdotter
Abstract: Abstract: We empirically analyze the impact of corporate
tax rates and agglomeration economies on FDI using panel data on bilateral
FDI flows and stocks in the enlarged European Union. The novelty of the
paper is that it explicitly deals with agglomeration forces and how these
may explain differences in tax policies between new and old member
countries. The empirical analysis closely follows the implicit underlying
model where the foreign direct investment decision is seen as a two-step
procedure that entails: 1) whether or not to invest; and 2) the amount of
FDI to invest. Using recent data on corporate tax rates for all 27 EU
member countries from 1995-2006, we find that there are large differences
in the determinants of FDI going to the EU15 and new member countries.
While tax differentials mainly seem to influence FDI flows to new members,
agglomeration economies appear to play a somewhat more important role for
the amount of investment made within the EU15. In addition, significant
differences are found between the determinants of the extensive and
intensive margins of the FDI decision.
Keywords: Corporate taxes; agglomeration economies; foreign direct investment; (follow links to similar papers)
JEL-Codes: F12; F15; F21; H71; (follow links to similar papers)
34 pages, March 15, 2010
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