Fiscal Incentives, European Integration and the Location of Foreign Direct Investment

28 Pages Posted: 12 May 2003

See all articles by Florence Hubert

Florence Hubert

National Institute of Economic and Social Research

Nigel Pain

National Institute of Economic and Social Research (NIESR)

Abstract

Foreign direct investment in the European Economic Area (EEA) has grown rapidly in recent years. This paper tests for structural change in the geographical and industrial pattern of foreign direct investment in Europe using a panel data set on outward investment by German companies in the EEA since 1980. There is evidence of significant structural change since 1990, with nearly all locations and industries seeing a higher level of cross-border investment than might have been expected. We also investigate the scope for national governments to affect location choice through the use of fiscal instruments such as corporation taxes, investment in infrastructure and other forms of development grants and subsidies. The findings are mixed. Some measures, such as tax competitiveness, appear important but are sensitive to the specification of the model. However, the level of government fixed investment expenditure relative to that in other economies is found to have a significant positive impact, particularly in locations with less need for EU structural funds. Although the direct marginal impact appears relatively small, an additional finding of significant agglomeration forces suggests that fiscal policies could still have a permanent influence on the location of economic activities.

Suggested Citation

Hubert, Florence and Pain, Nigel, Fiscal Incentives, European Integration and the Location of Foreign Direct Investment. The Manchester School, Vol. 70, pp. 336-363, 2002. Available at SSRN: https://ssrn.com/abstract=320683

Florence Hubert

National Institute of Economic and Social Research

2 Dean Trench Street
Smith Square
London SW1P 3HE
United Kingdom

Nigel Pain (Contact Author)

National Institute of Economic and Social Research (NIESR) ( email )

2 Dean Trench Street
Smith Square
London SW1P 3HE
United Kingdom
0171 222 7665 (Phone)
0171 654 1900 (Fax)

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