Tax Competition and Foreign Direct Investment: assessing the role of market potential and trade costs in a "Footloose Capital" framework

Vincent Delbecque

No 2008-18, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: This paper investigates the impact of the corporate income tax on the geographical distribution of French firms Foreign Direct Investment port- folio across 26 European countries. The empirical assessment is based on Baldwin (1999) new economic geography model in which we focus on the location of firms with respect to level of taxation. In this model, the magnitude of the impact of taxation on location decision partly depends on the market size and the level of trade costs. Indeed, firms may not only seek lower production costs but better market access and market opportunity when investing abroad. Through panel data regressions, we find a negative impact of the corporate income tax rate on Foreign Direct Investment. We also find that trade costs between source and host coun- try increases Foreign Direct Investment. In advanced specifications we show that increasing trade costs reduce the impact of tax level on capital location.

Keywords: Corporate taxation; Firm-level data; Foreign Direct Investment; Trade Costs (search for similar items in EconPapers)
JEL-codes: C33 F21 F23 H25 R38 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2008
New Economics Papers: this item is included in nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2008-18

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