Taxes and Location of Foreign Direct Investments: An Empirical Analysis for the European Union Countries

33 Pages Posted: 1 Aug 2007

See all articles by Roberta de Santis

Roberta de Santis

Italian National Institute of Statistics

Maria Cristina Mercuri

ISAE, Istituto di Studi e Analisi Economica

Claudio Vicarelli

ISTAT - Italian National Institute of Statistics

Date Written: November 2001

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

JEL Classification: F12, F23, H87

Suggested Citation

de Santis, Roberta and Mercuri, Maria Cristina and Vicarelli, Claudio, Taxes and Location of Foreign Direct Investments: An Empirical Analysis for the European Union Countries (November 2001). ISAE Working Paper No. 24, Available at SSRN: https://ssrn.com/abstract=1004255 or http://dx.doi.org/10.2139/ssrn.1004255

Roberta De Santis (Contact Author)

Italian National Institute of Statistics ( email )

Via Cesare Balbo 16
00184 Rome, 0185
Italy

Maria Cristina Mercuri

ISAE, Istituto di Studi e Analisi Economica ( email )

Piazza dell' Indipendenza 4
I-00185
Italy

Claudio Vicarelli

ISTAT - Italian National Institute of Statistics ( email )

Via Cesare Balbo 16
00184 Rome, 0185
Italy

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