Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/74844 
Year of Publication: 
2007
Series/Report no.: 
LICOS Discussion Paper No. 193
Publisher: 
Katholieke Universiteit Leuven, LICOS Centre for Institutions and Economic Performance, Leuven
Abstract: 
This paper analyzes the importance of taxes on corporate income and production-related tangible infrastructure as detfirminants 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 detfirminants 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 detfirminants 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 CEE host countries 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.
Subjects: 
Foreign direct investment
transition economies
infrastructure
taxation
JEL: 
F15
F21
F23
Document Type: 
Working Paper

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