Tax incentives and the location of FDI: Evidence from a panel of German multinationals

Abstract

Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar.Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp0476.pdf Abstract: Using a firm-level dataset this paper investigates the impact of taxation on the decision of German multinationals to hold direct investments in other European countries or abroad. Controlling for firm-specific differences in the valuation of potential locations, the results confirm significant effects of tax incentives, market size, and of labor cost on cross-border location decisions.In accordance with Devereux and Griffith (1998) we find that the marginal tax rate has no predictive power for location decisions whereas effective average and statutory tax rates exert significant effects. In particular, the statutory tax rate has strong predictive power for the likelihood of direct investment holdings at a location. Nontechnical SummaryInitiated by the study of Hartman (1984) several empirical studies have investigated the influence of taxes on cross-border investments of multinational firms. However, in most studies the focus is on the level of investment and its distribution rather than on the underlying location decisions. An exception is the seminal contribution by Devereux and Griffith (1998) who establish the significance of the effective average tax rate for the choice of location of subsidiaries within Europe using firm-level data for U.S. enterprises. The scarcity of evidence on the impact of taxation on location decisions might be due to the fact that the corresponding analysis cannot be done using aggregate FDI data, but requires data on individual cross-border investments, which are usually difficult to obtain. Only recently the Bundesbank has made available for research its micro-level dataset for foreign direct investment, which offers interesting opportunities to study international location decisions (see Lipponer, 2003, for a description of the dataset). The aim of the current paper is to use this new and promising dataset in order to study empirically the location decisions of German multinationals. More specifically, the paper investigates the impact of taxation on the decision of German multinationals to hold a foreign direct investment at a specific location. Furthermore, as questionnaires among executives emphasize the significance of statutory tax rates as compared to effective tax rates (Sørensen, 1992), the predictive power of alternative indicators of taxing incentives is tested.Controlling for firm-specific differences in the valuation of potential locations, the results confirm signif...

German and Austrian Foreign Direct Investment in Brazilian Regions: Which Are the Location Choice Factors?

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Taxation Influence on the Economic Growth

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