Infrastructure Endowment and Corporate Income Taxes as Determinants of Foreign Direct Investment in Central- and Eastern European Countries

LICOS Discussion Paper No. 193/2007

29 Pages Posted: 16 Mar 2008  

Christian Bellak

WU, Vienna University of Economics and BA

Markus Leibrecht

Vienna University of Economics and Business Administration

Jože P. Damijan

University of Ljubljana, Slovenia - Department of International Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2007

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 CEECs 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

JEL Classification: F15, F21, F23

Suggested Citation

Bellak, Christian and Leibrecht, Markus and Damijan, Joze P., Infrastructure Endowment and Corporate Income Taxes as Determinants of Foreign Direct Investment in Central- and Eastern European Countries (2007). LICOS Discussion Paper No. 193/2007. Available at SSRN: https://ssrn.com/abstract=1106117 or http://dx.doi.org/10.2139/ssrn.1106117

Christian Bellak (Contact Author)

WU, Vienna University of Economics and BA ( email )

Welthandelsplatz 1
Vienna, Vienna 1020
Austria
00431313364505 (Phone)

HOME PAGE: http://https://www.wu.ac.at/u/bellak/

Markus Leibrecht

Vienna University of Economics and Business Administration ( email )

Augasse 2-6
A-1090 Wien
Austria

Joze P. Damijan

University of Ljubljana, Slovenia - Department of International Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia
+386 61 189 24 00 (Phone)
+386 61 189 26 98 (Fax)

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