Taxation and foreign direct investment : a synthesis of empirical research

This paper reviews the empirical literature on the impact of company taxes on the allocation of foreign direct investment. We make the outcomes of 25 empirical studies comparable by computing the tax rate elasticity under a uniform definition. The mean value of the tax rate elasticity in the literature is around -3.3, i.e. a 1%-point reduction in the host-country tax rate raises foreign direct investment in that country by 3.3%. There exists substaintial variation across studies, however. By performing a meta analysis the paper aims to explain this variation by the differeces in characteristics of the underlying studies. Systematic differences between studies are found with respect of the type of foreign capital data used, and the tax rates apopted. We find no systematic differences in the responsiveness of investors from tax credit countries and tax exemption countries.