The Impact of Taxes and Public Spending on the Location of FDI: Evidence from FDI-flows within Europe

In a place to place analysis of bilateral FDI flows the average company tax burden, the statutory corporation tax rate, as well as the cost of capital are used to capture the tax incentives. In addition, indicators of public spending in general and with regard to different functions of government and rankings of competitiveness related to public sector activities are used to measure the role of public service provision. The results show significant effects of tax incentives, in particular, the marginal tax burden and the statutory tax rate prove jointly significant. However, only weak indications of a countervailing effect of public expenditures are found.

Büttner, Thiess (2002), The Impact of Taxes and Public Spending on the Location of FDI: Evidence from FDI-flows within Europe, ZEW Discussion Paper No. 02-17, Mannheim.