Tax Competition and Foreign Direct Investment

Abstract

March 2001 Abstract: The increasing EU integration raises fears of tax competition. In contrast, the economic geography literature underscores the possibility of taxing location rents associated with agglomeration economies. We empirically show that, although agglomeration-related factors are strong determinants of FDI, tax differentials also play a significant role as far as tax schemes (credit versus exemption) are accounted for. This evidence is found on a panel of bilateral FDI flows across 11 OECD countries over the 1984-1996 period. Both statutory and effective tax rates are used and corrected for tax schemes applied to repatriated profits, and gravity factors are controlled for. JEL classification: F21, H25, H87.