Markus Leibrecht

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.

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.

Modeling FDI based on a spatially augmented gravity model: Evidence for Central and Eastern European Countries

Based on a spatially augmented gravity model, the current paper isolates spatial interrelationships in foreign direct investment (FDI) to Central and Eastern European Countries (CEECs) not only across the destination but also across the origin country dimension of FDI. Results show that (i) spatial interrelationships across destination countries are present and are consistent with the predominance of vertical-complex FDI in total FDI; (ii) spatial correlation across origin countries is given in earlier years of transition, while spillover and competition effects cancel over the whole sample period; and (iii) agglomeration forces gain in importance for FDI to CEECs.

Tax Competition as a Cause of Falling Corporate Income Tax Rates: A Survey of Empirical Literature

Since the mid 1980s, tax rates on corporate income have declined in most industrialized countries. Tax competition between countries for mobile capital has frequently been mentioned as an explanation for this development. A vast empirical literature dealing with tax competition for mobile capital has emerged. This paper categorizes and summarizes the existing empirical studies on this issue. Particular focus is placed on the isolation of the substantive implications the quantitative study outcomes convey. Given the empirical evidence surveyed, it appears that tax rates indeed decline due to tax competition between countries, and in particular due to competition for profits. In addition to summarizing the substantive implications of the existing empirical literature, the paper addresses the question of whether the existing studies can convincingly isolate tax competition as a driver of falling corporate income tax rates.

How Important is Employment Protection Legislation for Foreign Direct Investment Flows in Central and Eastern European Countries

In this article we investigate empirically the importance of labour market conditions and in particular the role of employment protection legislation as determinants of bilateral Foreign Direct Investment (FDI). We find that FDI flows are significantly higher in countries with relatively low unit labour costs. We also find that employment protection legislation does not exert a statistically significant impact on FDI flows. Our results are consistent with the interpretation that transition economies attract FDI via low production costs whereas indirect costs related to the rigidity of the labour market are less relevant.

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.

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.

Banks, Financial Markets and International Consumption Risk Sharing

In this paper we empirically explore how characteristics of the domestic financial system influence the international allocation of consumption risk using a sample of OECD countries. Our results show that the extent of risk sharing achieved does not depend on the overall development of the domestic financial system per se. Rather, it depends on how the financial system is organized. Specifically, we find that countries characterized by developed financial markets are less exposed to idiosyncratic risk, whereas the development of the banking sector contributes little to the international diversification of consumption risk.

How Does Globalization Affect the Implicit Tax Rates on Labor Income, Capital Income, and Consumption in the European Union?

This article analyzes the effects of globalization on implicit tax rates (ITRs) on labor income, capital income, and consumption in the EU15 and Central and Eastern European New Member States (CEE NMS). We find supportive evidence for an increase in the ITR on labor income in the EU15, but no effect on the ITR on capital income. There is evidence of convergence in terms of the ITR on consumption, as countries with higher than average ITR on consumption respond to globalization by decreasing their tax rates. There are important differences among the welfare regimes within the EU15. Social-democratic countries have decreased the tax burden on capital, but increased that on labor due to globalization. Globalization exerts a pressure to increase taxes on labor income in the conservative and liberal regimes as well. Taxes on consumption decrease in response to globalization in the conservative and social-democratic regimes. In the CEE NMS, there is no effect of globalization on the ITR on labor and capital income, but we find a negative impact on the ITR on consumption in the CEE NMS with higher than average ITR on consumption. (JEL H23, H24, H25, F19, F21)