To Which Tax Rate Does Investment Respond? A Synthesis of Empirical Research on Taxation and Foreign Direct Investment

The paper by Sjef Ederveen and Ruud de Mooij surveys the empirical studies on the effect of taxation on foreign direct investment. After having presented a review of the existing literature on the impact of taxation on the investment of multinational enterprises, the paper summarises the main results of this literature by using the so-called meta-analysis. The meta-analysis evaluates how the variation in the estimated elasticity across different studies depends on the characteristics of the studies. In so doing, it allows a direct comparison of the values of the elasticity. The outcomes of the individual studies are regressed, after having been transformed into a uniformly defined elasticity, on a set of variables reflecting various study characteristics. Although results have to be interpreted with caution, the paper estimates that the elasticity of foreign direct investment to changes in the tax rate is on average about -3.3. In explaining differences among studies, the choice of the tax variable definition plays a crucial role: effective tax rates yield higher elasticities than statutory tax rates and, among them, the ex ante rates yield the highest elasticity. One may conclude that while standard regression analysis aims at better understanding the underlying data, meta-regression can be seen as the method to better understand the existing literature by identifying study characteristics which are responsible for the variations in the estimated elasticity