The Corporate Tax Effect on Inflows of Foreign Direct Investment: The case of OECD countries

Abstract: There is a reasonable amount of literature and discussions among scholars on the effect of host country corporate taxation on the inflows of foreign direct investment (FDI). This study is an attempt to analyse this effect in 25 high income OECD countries over the period of 1996 until 2009. The main objective of the paper is to prove statistically whether there is significant and negative relationship between the inflows of FDI and corporate taxation in the selected sample of OECD countries during the specified time span. This relationship is investigated with OLS regression analysis with pooled panel data to find to what extent the selected explanatory variable effective tax rate (ETR) along with trade openness, long term interest rate, share of internet users and labour cost have an impact on the dependent variable - FDI relative to GDP. Finally, it is proved that the elasticity between corporate taxation and FDI is positive at a level below the average effective tax rate and negative above the average level of effective tax rate. In addition, all other important variables included in the regression model are found to be significant determinants of FDI. The study is based on relevant literature and the statistical analysis is made in regard to the models described in scientific articles in the paper.