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Labor Taxes and FDI Decisions in the European Union

Hansson, Åsa LU and Olofsdotter, Karin LU (2011)
Abstract
This paper uses panel data on bilateral FDI flows in the European Union to empirically analyze the impact of labor and corporate taxations on FDI decisions. While the effect of corporate taxes on FDI is well documented, the impact of labor taxes on FDI has been neglected. This is surprising since labor taxation may influence FDI as well. The reason for this is that taxation of labor affects the production cost and the ability to attract and retain productive labor and ultimately the investment return. By employing a Heckman two-step estimation model, which controls for possible sample selection bias due to many zero bilateral observations, it is found that labor taxes do influence FDI decisions. The effect is significant both statistically... (More)
This paper uses panel data on bilateral FDI flows in the European Union to empirically analyze the impact of labor and corporate taxations on FDI decisions. While the effect of corporate taxes on FDI is well documented, the impact of labor taxes on FDI has been neglected. This is surprising since labor taxation may influence FDI as well. The reason for this is that taxation of labor affects the production cost and the ability to attract and retain productive labor and ultimately the investment return. By employing a Heckman two-step estimation model, which controls for possible sample selection bias due to many zero bilateral observations, it is found that labor taxes do influence FDI decisions. The effect is significant both statistically and economically, although the magnitude is smaller than for corporate tax. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Working Paper
publication status
published
subject
keywords
labor taxation, foreign direct investment
pages
40 pages
publisher
SWOPEC
language
English
LU publication?
yes
id
99b74d32-9f77-4910-b385-c753fe80b01f (old id 2206147)
date added to LUP
2011-11-25 14:56:14
date last changed
2016-04-16 08:23:16
@misc{99b74d32-9f77-4910-b385-c753fe80b01f,
  abstract     = {This paper uses panel data on bilateral FDI flows in the European Union to empirically analyze the impact of labor and corporate taxations on FDI decisions. While the effect of corporate taxes on FDI is well documented, the impact of labor taxes on FDI has been neglected. This is surprising since labor taxation may influence FDI as well. The reason for this is that taxation of labor affects the production cost and the ability to attract and retain productive labor and ultimately the investment return. By employing a Heckman two-step estimation model, which controls for possible sample selection bias due to many zero bilateral observations, it is found that labor taxes do influence FDI decisions. The effect is significant both statistically and economically, although the magnitude is smaller than for corporate tax.},
  author       = {Hansson, Åsa and Olofsdotter, Karin},
  keyword      = {labor taxation,foreign direct investment},
  language     = {eng},
  note         = {Working Paper},
  pages        = {40},
  publisher    = {SWOPEC},
  title        = {Labor Taxes and FDI Decisions in the European Union},
  year         = {2011},
}