Aleksandra Riedl

Regional Convergence Clubs in Europe: Identification and Conditioning Factors

The aim of this paper is to empirically identify convergence clubs in per capita incomes of European regions and to investigate whether initial conditions - as suggested by the club convergence hypothesis - are responsible for club formation. To tackle this issue, we propose a two-step procedure in which we first endogenously identify groups of regions that converge to the same steady state level, and in a second step we investigate the role of starting conditions and structural characteristics for a regions club membership. Our sample comprises 206 European NUTS2 regions between 1990 and 2005. The results strongly support the existence of convergence clubs, indicating that European regions form five separate groups converging to their own steady state paths. Moreover, estimates from an ordered probit model reveal that the level of initial conditions such as human capital and per capita income plays a crucial role in determining the formation of convergence clubs among European regions.

Location Factors of FDI and the Growing Services Economy

Foreign direct investment (FDI) has increasingly shifted toward the service sector. This change in the industrial composition of FDI and the non- tradable nature of services may have altered the importance of location factors for investment decisions. To capture potential changes in FDI determinants, a contrasting sectoral analysis is performed. Based on FDI stock data from eight new EU member states for the period 1998–2004, we implement a dynamic panel approach allowing the speed of adjustment to the equilibrium investment level to vary across sectors. Results support our assumption that investment into the service sector, which is characterized by low installation costs, adjusts much faster to its desired level than manufacturing FDI. Thus, government interventions to attract FDI are likely to boost the service sector immediately while having a slower impact on manufacturing FDI. Furthermore, as services are mostly non-tradable, FDI into this sector is largely based on market-seeking motives while FDI in the manufacturing sector is also driven by international price competitiveness measured by real unit labour costs.

Testing the Tax Competition Theory: Evidence for OECD Countries

In this paper, we test one of the fundamental assumptions in the tax competition literature, namely, that a countrys taxable income depends on the tax policies pursued in the domestic and in neighboring countries. Based on a panel of annual data of 18 OECD countries spanning the period 1982 to 2005, we show that the common trend in falling corporate income tax (CIT) rates can in part be explained by the existence of fiscal externalities in the form of tax-induced international resource flows. Our results confirm the presumption put forward in recent empirical tax reaction function studies, that interdependent tax setting behavior is evidence of tax competition. However, the estimated tax base elasticities suggest that the trend in falling CIT rates has not contributed to the observed rise in CIT revenues in OECD countries between 1982 and 2005.