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

Roberta de Santis (), Maria Cristina Mercuri and Claudio Vicarelli
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Maria Cristina Mercuri: ISAE - Institute for Studies and Economic Analyses

No 24, ISAE Working Papers from ISTAT - Italian National Institute of Statistics - (Rome, ITALY)

Abstract: 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).

Keywords: Foreign Direct Investments; Competitiveness; International Fiscal Issues (search for similar items in EconPapers)
JEL-codes: F12 F23 H87 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2001-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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