Tax Structures and FDI: The Deterrent Effects of Complexity and Uncertainty

In this study, we examine the connection between the varied experiences of the transition countries in attracting foreign direct investment (FDI) and their diverse experiences in transforming their tax structures to be consistent with a market economy. In particular, we study whether complexity and uncertainty in their tax laws have deterred FDI by increasing transaction costs, the compliance burden and the unpredictability of tax liabilities. Our results indicate that complexity and uncertainty, in the sense of multiple tax rates, indeterminate language in the tax law and inconsistent changes in the tax laws, have a significant negative effect on inward FDI.