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Are Government Policies More Important Than Taxation in Attracting FDI?

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Abstract

This paper attempts to broaden the existing empirical literature on foreign direct investment by incorporating government expenditure policies, such as investment in infrastructure, and institutional factors that may impact business investment, such as corruption, along with other conventional determinants such as taxes, location factors, and agglomeration effects. We do so in an unbalanced panel data setting, where we use fixed effects to control for country specific idiosyncrasies and also year dummies in some specifications. Our data include both developing and developed countries in different regions of the world. The regression results indicate that better infrastructure and lower taxes attract FDI, with weaker evidence suggesting lower corruption also increases FDI. These results are robust and hold after controlling for fixed country effects, common year effects of FDI, and agglomeration effects. The magnitude of the response of FDI to infrastructure changes is similar to that of taxes in elasticity terms. The results add evidence to previous cross-sectional results and emphasize the importance of a range of government policies in addition to taxation in attracting foreign direct investment.

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  • Timothy Goodspeed & Jorge Martinez-Vazquez & JLi Zhang, 2007. "Are Government Policies More Important Than Taxation in Attracting FDI?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0702, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    • Handle: RePEc:ays:ispwps:paper0702
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    1. Miroslav Mateev & Iliya Tsekov, 2014. "Are there any top FDI performers among EU-15 and CEE countries? A comparative panel data analysis," Financial Theory and Practice, Institute of Public Finance, vol. 38(3), pages 337-374.
    2. Muhammad Shahbaz & Miroslav Mateev & Salah Abosedra & Muhammad Ali Nasir & Zhilun Jiao, 2021. "Determinants of FDI in France: Role of transport infrastructure, education, financial development and energy consumption," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1351-1374, January.
    3. A. J. Khadaroo & B. Seetanah, 2010. "Transport infrastructure and foreign direct investment," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(1), pages 103-123.
    4. Yapatake Kossele Thales Pacific, 2015. "Foreign Direct Investment in Anglophone and Francophone African Countries," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 5(11), pages 337-350, November.
    5. Magdalena RADULESCU & Elena Nolica DRUICA, 2011. "FDIs and investment policy in some European countries after their EU accession. Challenges during the crisis," Romanian Journal of Economics, Institute of National Economy, vol. 33(2(42)), pages 169-183, December.
    6. . OLABISI, Olabode E & LAU, Evan, 2018. "Causality Testing between Trade Openness, Foreign Direct Investment and Economic Growth: Fresh Evidence from Sub-Saharan African Countries," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 71(4), pages 437-464.
    7. Paulo Elicha Tembe & Kangning Xu, 2012. "Attracting Foreign Direct Investment in Developing Countries: Determinants and Policies-A Comparative Study between Mozambique and China," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 3(4), pages 69-81, October.
    8. Ted Hayduk, 2019. "Leveraging sport mega events for international entrepreneurship," International Entrepreneurship and Management Journal, Springer, vol. 15(3), pages 857-881, September.
    9. Manuel Portugal Ferreira & Helder Costa Carreira & Dan Li & Fernando Ribeiro Serra, 2016. "The Moderating Effect of Home Country Corruption on the Host Country’s Ability to Attract FDI," Brazilian Business Review, Fucape Business School, vol. 13(4), pages 94-117, July.
    10. Cicatiello, Lorenzo & De Simone, Elina & Ercolano, Salvatore & Gaeta, Giuseppe Lucio, 2021. "Assessing the impact of fiscal transparency on FDI inflows," Socio-Economic Planning Sciences, Elsevier, vol. 73(C).
    11. John Anyanwu, 2011. "Working Paper 136 - Determinants of Foreign Direct Investment Inflows to Africa, 1980-2007," Working Paper Series 327, African Development Bank.
    12. Oana Cristina POPOVICI & Adrian Cantemir CĂLIN & Diana IVANA & Sorin DAN, 2021. "FDI Determinants Revisited: Extensive Evidence," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 103-123, December.
    13. Dharmapala, Dhammika & Hines Jr., James R., 2009. "Which countries become tax havens?," Journal of Public Economics, Elsevier, vol. 93(9-10), pages 1058-1068, October.
    14. repec:lic:licosd:19307 is not listed on IDEAS
    15. Godfred William Cantah & Gabriel William Brafu-Insaidoo & Emmanuel Agyapong Wiafe & Abass Adams, 2018. "FDI and Trade Policy Openness in Sub-Saharan Africa," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 44(1), pages 97-116, January.
    16. Oliver Morrissey, 2008. "Investment Provisions in Regional Integration Agreements for Developing Countries," Discussion Papers 08/06, University of Nottingham, CREDIT.
    17. Yu Fu & Agus Supriyadi & Tao Wang, 2018. "China’s Outward FDI in Indonesia: Spatial Patterns and Determinants," Sustainability, MDPI, vol. 10(12), pages 1-20, December.
    18. Erhard Reschenhofer & Michael Schilde & Eva Oberecker & Ellen Payr & Hasan Tandogan & Lea Wakolbinger, 2012. "Identifying the determinants of foreign direct investment: a data-specific model selection approach," Statistical Papers, Springer, vol. 53(3), pages 739-752, August.

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    Keywords

    FDI; government expenditures; tax level and corruption;
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