1. Trade, FDI and relocation: challenges for the EU
2nd Euroframe Conference on Economic Policy issues in the European Union
Trade, FDI and relocation: challenges for the EU
Vienna, June 3, 2005
Capital mobility and tax competition in the EU after enlargement MAŁGORZATA JAKUBIAK MAŁGORZATA MARKIEWICZ

2. Developments in statutory tax rates

3. Tax competition theory
Standard tax competition models identify fiscal externalities. Taxes are set too low resulting in underprovision of public goods and fall in welfare.
but:
Tax competition may be also efficiency enhancing – models with imperfectly competitive market structures, with government commitment problems and political economy considerations
also:
Tax competition not always results in low taxation. Inefficently high taxes in case of vertical tax competition (between different levels of governments) or with double taxation conventions.

4. How different are new member states?

5. How different are new member states?

6. Effective tax rates
Backward looking measures: micro (financial statements of enterprises) or macro (national accounts)
Forward looking measures: EMTR (marginal benefits = marginal costs) or EATR (when project earns more than capital cost)

7. Two measures – two stories

8. FDI inflows into EU-8 in millions of ecu/euro 1995-2003
Source: UNCTAD data converted into USD/EUR at average exchange rate

9. EU-15 FDI outflows to eight new member states, equity investments and loans only, in billions of ecu/euro,
Source: Eurostat

10. FDI outward stock in EU-8 by largest investing countries, in millions of ecu/euro 1995-2002

11. Model
Tax competition examined indirectly: do FDI flows react on changes in effective taxation (Buettner (2002), Gorter and Parikh (2000)
where:
σijt – flow of FDI from country i to j
tj – effective tax rate in country j
Xj – control variables: market size (motivates horizontal FDI flows), labor costs (resource seeking motive), bilateral trade.
Unbalanced sample of annual data on six NMS for the period
Fixed-effects and random-effects models
Variables in logs

12. Results for individual countries

13. Results for individual countries cont.

14. Conclusions
Predominant and only motive of locating FDI from EU-15 in the NMS since the mid 90s has been local market potential
Change in effective CIT rates are not significant for the EU-15 investment in EU-8
Labor market and trade proximity also do not seem play any role → horizontal nature of FDI.