Taxation, Business Environment and FDI Location in OECD Countries

35 Pages Posted: 14 Sep 2006

See all articles by Dana Hajkova

Dana Hajkova

Organization for Economic Co-Operation and Development (OECD)

Giuseppe Nicoletti

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Laura Vartia

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Kwang-Yeol Yoo

Republic of Korea - Ministry of Finance and Economy

Date Written: July 24, 2006

Abstract

This paper assesses the importance of taxation on foreign direct investment contributing to the literature in two ways. First, it relates bilateral FDI among OECD countries over the 1990s to a new set of estimates of corporate tax wedges that include many relevant aspects of FDI taxation. Second, it controls for a large set of additional policy and non-policy factors that may affect the attractiveness of a country for foreign investors. Furthermore, the empirical approach is novel in that it focuses on a semi-parametric estimation methodology that accounts for a number of unobserved effects possibly impinging on the choice of investment location by multinational enterprises. Consistent with previous findings, the estimation results suggest that corporate taxation has a non-negligible impact on FDI location choices. However, the results suggest that focusing only on taxation in home and host countries and omitting other policies (such as border policies and labour and product market settings) may lead to a serious overestimation of tax elasticities and their relevance for policy.

Keywords: Foreign direct investment, corporate taxation, regulation, panel data

JEL Classification: F21, F23, H25, C23, L50

Suggested Citation

Hajkova, Dana and Nicoletti, Giuseppe and Vartia, Laura and Yoo, Kwang-Yeol, Taxation, Business Environment and FDI Location in OECD Countries (July 24, 2006). OECD Working Paper No. 502, Available at SSRN: https://ssrn.com/abstract=930071 or http://dx.doi.org/10.2139/ssrn.930071

Dana Hajkova

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Giuseppe Nicoletti (Contact Author)

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France
+33 1 4524 8730 (Phone)
+33 1 4524 1347 (Fax)

Laura Vartia

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France

Kwang-Yeol Yoo

Republic of Korea - Ministry of Finance and Economy ( email )

Government Complex II
Gwacheon, 427-7
Korea, Republic of (South Korea)

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