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FDI, taxes and agglomeration economies in the EU15

Hansson, Åsa LU and Olofsdotter, Karin LU (2013) In Applied Economics 45(18). p.2653-2664
Abstract
This paper provides an empirical analysis of the impact of tax differentials and agglomeration economies on foreign direct investment (FDI). The paper departs from most previous work on FDI and tax competition in a number of ways. First, it incorporates several measures of agglomeration in order to investigate whether agglomeration economies mitigate the downward spiral in tax rates. As the strength of agglomeration economies may vary with the degree of integration, we use a panel of bilateral FDI flows for a highly integrated region including countries with similar economic structure–the EU15–from 1986 to 2004. Second, the empirical analysis explicitly deals with the problem of selection bias by using the Heckman sample selection... (More)
This paper provides an empirical analysis of the impact of tax differentials and agglomeration economies on foreign direct investment (FDI). The paper departs from most previous work on FDI and tax competition in a number of ways. First, it incorporates several measures of agglomeration in order to investigate whether agglomeration economies mitigate the downward spiral in tax rates. As the strength of agglomeration economies may vary with the degree of integration, we use a panel of bilateral FDI flows for a highly integrated region including countries with similar economic structure–the EU15–from 1986 to 2004. Second, the empirical analysis explicitly deals with the problem of selection bias by using the Heckman sample selection approach. Also, by focusing on the EU15, we are able to provide additional information on the determinants of FDI between similar, higher-income countries. The empirical analysis provides some evidence of corporate marginal effective tax rates having an impact on FDI. This result, however, is sensitive to the inclusion of agglomeration economies. In particular, we find both Marshall types of technological externalities and overall concentration of economic activity to have an influence on FDI flows and, moreover, mitigating the negative impact of taxes. (Less)
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Contribution to journal
publication status
published
subject
keywords
FDI, corporate tax rates, agglomeration economies, Heckman selection model
in
Applied Economics
volume
45
issue
18
pages
2653 - 2664
publisher
Routledge
external identifiers
  • wos:000321608500012
  • scopus:84860120205
ISSN
1466-4283
DOI
10.1080/00036846.2012.665596
language
English
LU publication?
yes
id
99e5f3ba-7c60-43b0-803d-a740362ae82d (old id 2493123)
alternative location
http://www.tandfonline.com/doi/pdf/10.1080/00036846.2012.665596
date added to LUP
2016-04-01 11:00:49
date last changed
2020-08-12 02:37:12
@article{99e5f3ba-7c60-43b0-803d-a740362ae82d,
  abstract     = {This paper provides an empirical analysis of the impact of tax differentials and agglomeration economies on foreign direct investment (FDI). The paper departs from most previous work on FDI and tax competition in a number of ways. First, it incorporates several measures of agglomeration in order to investigate whether agglomeration economies mitigate the downward spiral in tax rates. As the strength of agglomeration economies may vary with the degree of integration, we use a panel of bilateral FDI flows for a highly integrated region including countries with similar economic structure–the EU15–from 1986 to 2004. Second, the empirical analysis explicitly deals with the problem of selection bias by using the Heckman sample selection approach. Also, by focusing on the EU15, we are able to provide additional information on the determinants of FDI between similar, higher-income countries. The empirical analysis provides some evidence of corporate marginal effective tax rates having an impact on FDI. This result, however, is sensitive to the inclusion of agglomeration economies. In particular, we find both Marshall types of technological externalities and overall concentration of economic activity to have an influence on FDI flows and, moreover, mitigating the negative impact of taxes.},
  author       = {Hansson, Åsa and Olofsdotter, Karin},
  issn         = {1466-4283},
  language     = {eng},
  number       = {18},
  pages        = {2653--2664},
  publisher    = {Routledge},
  series       = {Applied Economics},
  title        = {FDI, taxes and agglomeration economies in the EU15},
  url          = {http://dx.doi.org/10.1080/00036846.2012.665596},
  doi          = {10.1080/00036846.2012.665596},
  volume       = {45},
  year         = {2013},
}