Determinants of Foreign Direct Investment in EU Countries – Do Corporate Taxes Really Matter?

Abstract

The inflows of foreign direct investment (FDI) are often seen as one of the factors increasing the economic growth of the country. Therefore, considerable attention is paid to examining of its determinants, of which corporate taxes is often seen as one. However, there is mixed evidence of the relationship between corporate taxes and FDI in the empirical literature. The main aim of our paper is to identify the key determinants of FDI in EU countries based on panel data regression models. Moreover, we focus our attention particularly on effective and statutory corporate tax rates and their impact on FDI. On the one hand, our results suggest that there is no statistically significant effect of corporate taxes on FDI. On the other hand, we find a significant effect of labour costs, openness of the economy, firing costs, GDP per capita and public debt in the country. There is also some evidence of a negative impact of the financial and economic crisis on FDI inflows in the EU.