The Effect of Corporate Tax Rate on Foreign Direct Investment A Panel Study for OECD Countries

Abstract

This paper examines the impact of corporate income tax rate on foreign direct investment level (FDI) in the OECD countries. We attempt to find the impact of reduced corporate tax rate on foreign direct investment. We find that FDI level increases significantly following tax rate reductions at univariate level. We use fixed effect panel estimation and GMM method of estimation to test the relation between tax rate and FDI level. We report a negative relation between tax rate and FDI level. Our findings show that the countries which reduce their tax rates, attract higher level of FDI following this reduction.

Keywords: foreign direct investment, OECD, corporate tax rate