Federalism and Foreign Direct Investment - An Empirical Analysis

38 Pages Posted: 11 Jun 2021

See all articles by Lars P. Feld

Lars P. Feld

Walter Eucken Institute; University of Freiburg - College of Economics and Behavioral Sciences; CESifo (Center for Economic Studies and Ifo Institute)

Ekkehard A. Koehler

University of Siegen - Department of Economics; Walter Eucken Institute; University of Freiburg - College of Economics and Behavioral Sciences

Leonardo Palhuca

Walter Eucken Institute

Christoph A. Schaltegger

University of Lucerne

Date Written: 2021

Abstract

Previous empirical studies suggest that decentralization, measured by the number of government layers, is associated with less foreign direct investment (FDI). With an improved dataset on tax autonomy of sub-federal government tiers, we present evidence that fiscal decentralization (de facto) does not reduce FDI. If local governments can set their tax rates and bases independently, they attract more FDI. Analyzing 83,458 corporate cross-border acquisitions (CBA), between 148 source and 187 host countries from 1997 to 2014, we also find that takeovers between two countries increase with size, cultural similarities and common borders of two economies. Shared institutions such as membership in a customs union facilitate CBA. These results apply for high-income hosts but not for middle-income countries.

JEL Classification: G340, H250, H710

Suggested Citation

Feld, Lars P. and Koehler, Ekkehard A. and Palhuca, Leonardo and Schaltegger, Christoph A., Federalism and Foreign Direct Investment - An Empirical Analysis (2021). Available at SSRN: https://ssrn.com/abstract=3863823 or http://dx.doi.org/10.2139/ssrn.3863823

Lars P. Feld (Contact Author)

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg im Breisgau, Baden-W├╝rttemberg D-79100
Germany

University of Freiburg - College of Economics and Behavioral Sciences ( email )

Freiburg, D-79085
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Ekkehard A. Koehler

University of Siegen - Department of Economics ( email )

Department of Economics
Hoelderlinstr. 3
Siegen, 57068
Germany

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg, 79100
Germany

University of Freiburg - College of Economics and Behavioral Sciences ( email )

Freiburg, D-79085
Germany

Leonardo Palhuca

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg im Breisgau, Baden-W├╝rttemberg D-79100
Germany

Christoph A. Schaltegger

University of Lucerne ( email )

Hofstrasse 9
P.O. Box 7464
Luzern 7, CH - 6000
Switzerland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
18
Abstract Views
112
PlumX Metrics