Do Low Corporate Income Tax Rates Attract FDI? Evidence from Eight Central and East European Countries

Abstract

We estimate a panel of 56 bilateral country-relationships of 7 home and 8 host countries of foreign direct investment (FDI) from 1995-2003 using a panel gravity-model setting to analyze 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 is also an important determinant of the location decisions and roughly equally important to other cost factors. The semi-elasticity of FDI with respect to taxation is between -3.3 and -4.6, which in absolute terms is above those of earlier studies. This can partly be attributed to using a superior measure of corporate income tax burden.