THE IMPACT OF CORPORATE INCOME TAXATION ON FOREIGN DIRECT INVESTMENT INTO EUROPEAN UNION MANUFACTURING SECTOR

This paper investigates the impact of corporate taxation on the location of foreign direct investments in European Union countries. Significant changes have occurred in EU economic environment during last decades: enlargement of European Union (EU) and European Monetary Union (EMU), decreasing the tax levels due to the tax competition, deep economic crisis followed the period of growth, and the FDI flows have increased considerably during the period. The analysis was conducted based on the aggregated manufacturing foreign direct investments world flows into 23 European Union countries. The main result from estimated econometric model based on a cross-section data of country variables is that effects of taxation on manufacturing foreign direct investment are statistically significant. The results show that increase of nominal corporate income tax by one per cent is associated with decrease of manufacturing FDI by 0.03 percentage points. Considerable differences were discovered in the behaviour of FDI flows into small and large countries. Larger countries face lower elasticity of FDI to the tax rate. The results suggest that tax policy aimed to increase FDI is particularly important for smaller countries.