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

Christian Bellak, Markus Leibrecht, Joze P. Damijan
2007 Social Science Research Network  
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more » ... von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper analyzes 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 operationalize 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. Thus, we posit that there are likely to be interaction effects between taxes and infrastructure as determinants of FDI. Specifically, a favorable 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 7 home in 8 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.
doi:10.2139/ssrn.1106117 fatcat:cktomrmnerc4xhqo35emj3743y