Effective Tax Rates as a Determinant of Foreign Direct Investment in Central and East European Countries: A Panel Analysis
SFB International Tax Coordination Paper No. 7
29 Pages Posted: 12 Dec 2005
Date Written: September 19, 2005
The Central- and East European Countries have lowered their corporate tax rates substantially in order to induce shifts of production capacity to their countries. This paper analyses empirically how inward Foreign Direct Investment (FDI) flows channeled to these countries reacts to these tax policies. We estimate a panel of 35 bilateral country-relationships over a period of 1995-2002. Results suggest a semi-elasticity of -2.93 which is in line with results derived in studies mainly on OECD countries. This indicates that from an individual country perspective, tax-lowering strategies have been successful in the past, yet they may not be a successful policy option for the future when privatization-related FDI will decrease.
Keywords: Taxation, Foreign Direct Investment, Multinational Enterprises, Transformation Economies
JEL Classification: F21, H25
Suggested Citation: Suggested Citation