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Labor Taxation and FDI Decisions in the European Union

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  • Åsa Hansson
  • Karin Olofsdotter

Abstract

This paper uses panel data on bilateral FDI stocks in the European Union to empirically analyze the impact of labor and corporate taxations on FDI decisions. While the effect of corporate taxes on FDI is well documented, the impact of labor taxes on FDI has barely been explored. This is surprising since labor taxation may influence FDI as well; the taxation of labor affects the production cost and the ability to attract and retain productive labor, and thereby it also, ultimately, impacts the return to the investment. By employing a Heckman two-step estimation model, which controls for possible sample selection bias due to many zero bilateral observations, we find that labor taxes do influence FDI decisions. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Åsa Hansson & Karin Olofsdotter, 2014. "Labor Taxation and FDI Decisions in the European Union," Open Economies Review, Springer, vol. 25(2), pages 263-287, April.
    • Handle: RePEc:kap:openec:v:25:y:2014:i:2:p:263-287
    DOI: 10.1007/s11079-013-9282-8
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    Cited by:

    1. Jan Tecl, 2017. "Labor Taxes and Decision about FDI in the EU," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2017(2), pages 41-54.
    2. Jan Tecl, 2018. "Measurement of Labour Taxation," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2018(1), pages 5-18.
    3. Peter Vaz da Fonseca & Michele Nascimento Juca, 2020. "The Influence of Taxes on Foreign Direct Investment: Systematic Literature Review and Bibliometric Analysis," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 55-77.
    4. Dackehag, Margareta & Hansson, Åsa, 2015. "Taxation of Dividend Income and Economic Growth: The Case of Europe," Working Paper Series 1081, Research Institute of Industrial Economics.
    5. Dackehag , Margareta & Hansson, Åsa, 2012. "Taxation of Income and Economic Growth: An Empirical Analysis of 25 Rich OECD Countries," Working Papers 2012:6, Lund University, Department of Economics.
    6. María J. Prados & Erik Meije & Francisco Pérez-Arce, 2019. "Macroeconomic Effects of Social Security Totalization Agreements," Working Papers wp407, University of Michigan, Michigan Retirement Research Center.

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    More about this item

    Keywords

    Labor taxation; Foreign direct investment; F12; F15; F21; H24; H73;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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