Tax Competition and the Pattern of European Foreign Direct Investment

This paper investigates the empirical importance of tax competitiveness for the location of foreign direct investment, focussing on the behaviour of UK and German corporations. We use two annual panel data sets covering their investment within eight other European countries as well as Australia, the United States and Japan, controlling for market size, relative costs, innovation, corporate financial constraints and sector-specific fixed effects. Our results indicate that tax competitiveness has had a significant effect on the level of foreign investment, particularly within Europe. Similar effects are obtained for relative labour costs, implying that the relative level of social security taxes may also affect investment location.