The Determinants of FDI Flows from the EU‐15 to the Visegrad Group Countries – A Panel Gravity Model Approach

Abstract

The objective of this paper is to evaluate determinants of the general FDI flow to Visegrad countries and the effect of participation in EMU and EU. Research Design & Methods: It was decided to investigate how augmented Gravity Model of trade allows identifying and evaluating the significance of pull and push factors of FDI. In an empirical analysis of panel data Hausman-Taylor estimator was used because of the time-invariant variables presence. Findings: While investment decisions regarding the choice of country are determined by the size of the target market, the distance is still a negative factor in creation of FDI volume. Additionally, it was proven that membership in EMU, differences in taxation, historical background, access to the sea and prices stability have significant impact of FDI stock formation in each country belonging to V4. Is was also noted that Poland became a leader of the V4 as well as EU-12 FDI market sourcing from the old EU Member States. Implications & Recommendations: It is necessary to develop an "FDI attracting mechanism" using existing resources. Business regulations and taxation policy as well as main macroeconomic variables which are responsible for the economy standing are also examined as attracting the FDI flow. Contribution & Value Added: The originality of this work lies in studying some aspects of FDI inflow into the group of both similar and different countries in economic measures terms.

Untitled

“…Leading studies using such models have been published by Bruno et al (2016), Barrell et al (2017) and Welfens & Baier (2018) where all analyze the effect of European Union membership and FDI attractiveness (mainly in the context of Brexit), using OECD stock and flow data from 1985-2012. Welfens & Baier (2018) also control for corporate tax, and find similar results as Folfas (2011) and Wojciechovski (2013) for their gravity tax research, who use Hausman-Taylor estimators without dyadic fixed effects, but instead the full set of time non-varying CEPII country and country pair variables such as distance, contiguity, common language or colonial relationship and so on. The fact that all three studies yield similar results despite using different econometrical approaches is picked up subsequently in following sections.…”

“…In our OECD sample, dyadic fixed effects will control for potential outliers, such as Brazil, which have never signed (or resigned) any tax treaties with several OECD partners. Another solution to double taxation treaties can be the usage of effective average tax rates, which reflect national or bilateral tax incentives, an approach which yields similar results in gravity model settings (Bellak et al 2009 andEgger et al 2009) than when using pure corporate tax rates in OECD or EU samples only (Folfas 2011;Welfens & Baier 2018;Wojciechovski 2013).  Regional difference in international taxation: In a global perspective, developing economies face much greater competition pressures concerning FDI attractiveness, and generating corporate tax incentives usually has a higher effect, especially in the absence of (bilateral) tax treaties, where they can use discriminatory tax policy in an -…more targeted and cost efficient manner‖ (Andersen et al 2018).…”

Determinants of inward FDI into Visegrad countries: empirical evidence based on panel data for the years 2000–2012

“…Additionally we decided to take into account oth-er variables expressing the geography [Wojciechowski and Lubacha-Sember 2014] (location), that is the access to the sea [Wojciechowski 2013], and a common border with V4 countries [Fitzsimons, Hogan, and Neary 2013;Felipe and Kumar 2010;Kepaptsoglou, Karlaftis, and Tramboulas 2010]. MartinezZarzoso and Nowak-Lehman [2002] applied the augmented gravity model to assess Mercosur-EU trade, and the trade potential following the agreements that were reached between both trade blocks.…”

BREXIT and Foreign Direct Investment: Key Issues and New Empirical Findings

“…In Section 3, we therefore introduce the exchange rate aspect into our model. Folfas (2011) and Wojciechowski (2013) use Hausman-Taylor gravity estimators to determine FDI flows between EU countries. Their reason not to utilize PPML models is that time-invariant variables such as distance represent critical variables in their research question.…”