Infrastructure endowment and corporate income taxes as determinants of Foreign Direct Investment in Central- and Eastern European Countries

Christian Bellak, Markus Leibrecht and Joze Damijan

LICOS Discussion Papers from LICOS - Centre for Institutions and Economic Performance, KU Leuven

Abstract: This paper analyzes the importance of taxes on corporate income and production-related tangible infrastructure as determinants of Foreign Direct Investment (FDI) in Central- and Eastern European Countries (CEECs). We operationalize taxes using effective average tax rates on the bilateral level and employ indices derived from principal component analysis as a proxy for the infrastructure endowment. In the empirical analysis we control for a possible interrelation between taxes and infrastructure as determinants of FDI ?an issue usually neglected in the literature. Thus, we posit that there are likely to be interaction effects between taxes and infrastructure as determinants of FDI. Specifically, a favorable infrastructure endowment may compensate for relatively high taxes. Hence, higher taxes may not deter FDI. The results from our panel econometric analysis of bilateral outward FDI flows of 7 home in 8 CEE host countries for the 1995-2004 period in an augmented gravity model setting show that (i) both taxes and infrastructure play a role in the location decisions made by Multinational Enterprises; (ii) telecommunication and transport infrastructure are of special significance to FDI; and (iii) the tax-rate sensitivity of FDI indeed decreases with the level of infrastructure endowment.

Keywords: Foreign direct investment; transition economies; infrastructure; taxation (search for similar items in EconPapers)
JEL-codes: F15 F21 F23 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2007
New Economics Papers: this item is included in nep-eec, nep-pbe and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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http://www.econ.kuleuven.be/licos/publications/dp/dp193.pdf

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Journal Article: Infrastructure Endowment and Corporate Income Taxes as Determinants of Foreign Direct Investment in Central and Eastern European Countries (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:lic:licosd:19307

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