Does Corporate Tax Rate Affect FDI? Case Study of Core European Countries
Keywords:Corporate tax rate, FDI inflow, competitiveness, macroeconomic fundamentals, unit labor cost, fixed effect model, panel data
Though there is a huge amount of literature on the determinants of FDI, only a few studies have examined the impact of corporate tax rate on FDI inflow to core European countries. Indeed, European countries have experienced a huge difference in their ability to attract FDI and we suspect this is due to different tax regimes. Though traditional view has focused on the role of macroeconomic fundamentals on capital flow, more recent studies have emphasized on the impact of corporate tax rate. The question of the sensitivity of FDI to corporate tax rate is so far an uncertain empirical issue as some find evidence in the importance of tax rate others argue that countries with higher tax rate have attracted more FDI. This paper investigates whether corporate tax rate dominates the role of other macroeconomic fundamentals in shaping FDI to selected core European countries. Using panel data and fixed effect model for the period of 1990-2015 this study concludes that corporate tax rate plays a more important role than economic fundamentals in affecting FDI flow to Â core European countries; and that is why Franceâ€™s economy has stayed back of other core European countries in attracting FDI inflow.
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