THE IMPACT OF TAXATION AND AGGLOMERATION ECONOMIES ON FDI

Abstract

This paper aims at extending the empirical literature on foreign direct investment (FDI) determinants by examining how FDI reacts to corporate tax rates and whether this reaction is conditional on some other economic factors, such as agglomeration economies. To that end, we gather the relevant data on developed market economies and employ an appropriate econometric technique (Pooled Mean Group - PMG estimator) which allows for both dynamics and parameter heterogeneity to be included in the model. Our results suggest that both taxation and agglomeration economies play an important role in attracting FDI.