Christian Bellak

Do low corporate income tax rates attract FDI? – Evidence from Central- and East European countries

Fifty six bilateral country relationships combining 7 home countries from the EU and the US, and 8 Central and East European host countries (CEECs) of foreign direct investment (FDI) from 1995-2003 are used in a panel gravity-model setting to estimate the role of taxation as a determinant of FDI. While gravity variables explain most of the variation of FDI inflows, the bilateral effective average tax rate (beatr) is roughly equally important to other cost-related factors. The semi-elasticity of FDI with respect to taxes is about -4.3. This value is above those of earlier studies in absolute terms and can partly be attributed to using the beatr instead of the statutory tax rate. Our results indicate that tax-lowering strategies of CEEC governments seem to have an important impact on foreign firms location decisions.

Why Foreign-Owned Firms are Different: A Conceptual Framework and Empirical Evidence for Austria

Empirical studies continuously reveal differences in the performance of foreign-owned firms (FOFs) and domestically-owned firms (DOFs) across countries, industries, over time and also at the plant level. Empirical evidence, however, is not conclusive. In some studies, FOFs perform better than domestic ones and vice versa. Despite this ambiguity, there is considerable agreement that these differences can be referred to a limited number of explanatory factors, depending on the performance measure chosen (e.g., productivity, profitability, growth, skill or wage).

Infrastructure Endowment and Corporate Income Taxes as Determinants of Foreign Direct Investment in Central- and Eastern European Countries

This paper analyses the importance of taxes on corporate income and production-related tangible infrastructure as determinants of foreign direct investment (FDI) in Central and Eastern European countries (CEECs). We operationalise 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 determinants of FDI - an issue usually neglected in the literature. Specifically, a favourable 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 seven home countries in eight CEECs 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. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Ltd.

The measurement of foreign direct investment: A critical review

The extent of internationalization of certain countries is usually measured by trade and foreign direct investment (FDI). This article reviews state-of-the-art measurement concepts of FDI. In particular, the quality of FDI data as reported in conventional statistics is assessed and examples are given to show the limitations involved. Concepts of FDI, data sources, and measurement problems are discussed in detail. Several conclusions are drawn on related issues of improvements such as data collection, methodology and techniques, estimates versus evidence, the inclusion of new phenomena, international comparisons, and the validity of results. The difficult task is to compromise a careful analysis with innovative methodological approaches.

How Important is Foreign Direct Investment

The degree of multinationality of an economys production is determined by the extent of production in other economies by domestically owned firms, and by production located in the economy in question by foreign-owned firms. In the absence of direct measures, international production (that is, production under foreign ownership) is normally measured at a national level by outward and inward foreign direct investment (FDI) stocks. Unfortunately, the existing practice of reporting FDI stocks on a historical cost basis (i.e. book values) is unsatisfactory, because it does not take into account the age distribution of stocks, thus making accurate international comparisons of FDI stocks almost impossible (see e.g. Cantwell 1984, 1992; Bellak and Cantwell 1996). The authors have reestimated the FDI stocks of Japan, Germany, the U.S., and the U.K. at replacement values using a perpetual inventory model (PIM). The results cast doubt on some of the conventional wisdoms about international production, derived from historic cost data. Copyright 1998 by Blackwell Publishing Ltd

A Note on the Appropriate Measure of Tax Burden on Foreign Direct Investment to the CEECs

We argue from a conceptual and empirical point of view that tax-rate elasticities of foreign direct investment (FDI) to Central and East European Countries (CEECs) derived from statutory tax rates (STRs) are likely to be flawed. STRs are problematic measures of tax burden as they capture neither tax base effects, nor effects of the home country or international and supranational tax laws. From an empirical point of view STRs are questionable as their behavior over time and between country-pairs may differ from that of the conceptually superior bilateral corporate effective average tax rates (BCEATRs) of the Devereux-Griffith type. The variability of host-country STRs and BCEATRs of seven major home countries of FDI in eight major CEEC host countries is compared via Levene-tests for 1995--2005. Results indicate that using STRs instead of BCEATRs in empirical investigations of FDI is likely to result in tax-rate elasticities which are too low in absolute value.

Direct Versus Indirect FDI: Impact on Domestic Exports and Employment

One of the specific characteristics of Austrian Foreign Direct Investment (FDI) abroad is that a large part is carried out by firms, which themselves are affiliates of foreign Multinational Enterprises (MNEs). Such investment is termed indirect FDI in order to distinguish it from direct FDI, made by Austrian-owned firms. The objective of this paper is to analyse, whether the relatively better domestic employment performance of domestic firms (direct FDI) compared to foreign-owned firms (indirect FDI) can be linked to FDI abroad. Based on an analysis of the sales and trade structure of a sample of Austrian investors in Central and East European Countries (CEECs), this paper tests the hypothesis that these two groups of investors have different motives to invest in CEECs and therefore their activities in CEECs differ by type (sales affiliate, production abroad) and consequently the employment effects at home. Regression results confirm that direct FDI are more strongly determined by labour costs and exhibit an employment pattern related to a deeper international division of labour (including production), while indirect FDI is based relatively more on market seeking investment. Empirical results also confirm that employment effects at home differ. The positive (negative) effect of one additional unit of parent (affiliate) sales on domestic employment for indirect FDI compared to direct FDI is larger (smaller). The - despite this empirical fact - relatively better domestic employment performance of direct FDI is explained by their superior sales performance, resulting from restructuring their international division of labour.

Do Bilateral Investment Treaties Promote Foreign Direct Investment

Abstract The future of the international investment regime is rapidly evolving and many different kinds of investment treaties are now being negotiated. In particular, the EU, which is emerging as a new actor on the scene of international Foreign Direct Investment (FDI) policy will need to know what kind of FDI-related provisions it should favour. We argue that much can be learned from the substance of existing Bilateral Investment Treaties (BITs) as differences in legal provisions of BITs are crucial regarding the application of BITs in praxi. Therefore, this paper presents a new methodology to measure the effect of the essential legal provisions of BITs. Starting from a review of 40 empirical studies, the (heterogeneous) empirical results of the effects of BITs on FDI are summarized. In the conceptual part of this paper, the most important legal substantive criteria as well as the key technical features of BITs are identified together with their variants. These are the components of new BITSEL index.

New Evidence on the Tax Burden of MNC Activities in Central- and East-European New Member States

Company-taxation policies in the Central and East European New Member States (CEE-NMS) have been frequently characterised as tax-cutting strategies in order to attract Foreign Direct Investment (FDI). On the basis of a survey of six empirical studies a median value of the tax-rate elasticities of FDI of -0.22 in CEE-NMS and mediterranean periphery countries is derived. Yet, these tax-rate elasticities probably suffer from a sort of measurement error bias since these studies entirely rely on the host country Statutory tax rate as measure of tax burden. Building on a thorough criticism of FDI as a measure reflecting multinational activity and the Statutory tax rate as a reliable measure of the effective tax burden, 315 effective average bilateral tax rates (BEATR) are calculated for seven home countries and five CEE-NMS for the period 1996-2004, following the approach of Devereux and Griffith (1998). Since our empirical results show substantial differences in the variability of the host country Statutory tax rates and the BEATRs, it is contended that the latter should be used as explanatory variables in empirical studies.

Short-term Labour Migration from the Republic of Armenia to the Russian Federation

Abstract We explore the determinants of short-term labour migration from Armenia to Russia based on a unique panel dataset. A dynamic switching regression model with endogenous switching is applied. Our evidence pinpoints migration experience, the expected individual income gap from migration, low job opportunities in Armenia and the possibility of diversifying income risks as the most important determinants. Family ties turn out to be insignificant. The hypothetical income gap is about 280 per cent. Several explanations are provided for the fact that some individuals do not migrate in spite of a large income gap.