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

24 Pages Posted: 27 Apr 2009

See all articles by Christian Bellak

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

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Abstract

This paper analyses 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 operationalise 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. Specifically, a favourable 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 seven home countries in eight 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.

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. World Economy, Vol. 32, Issue 2, pp. 267-290, February 2009. Available at SSRN: https://ssrn.com/abstract=1395491 or http://dx.doi.org/10.1111/j.1467-9701.2008.01144.x

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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