Taxes and Foreign Direct Investments in the EU – do institutions matter?

How do national tax regimes and political institutions affect EU member states attractiveness to foreign investors? Many scholars have researched tax regimes and FDI and political institutions and FDI, but often in isolation. In this thesis, I replicate the findings of Gropp and Kostial (2000), and expand their analysis by including important political variables. By looking at 21 EU member states over 15 years (1998-2012), I use panel data analysis to show that institutions matter for investors, and that government output and general activity is important when investors choose where to invest. In particular, the amount of motorway and infrastructure in the EU member states is an important indicator in this respect. This thesis brings two additions to the existing literature, one methodological, and one substantial. Methodologically, I will show that model specifications in many ways determine the outcome of the analysis, and that scholars need to challenge their data in order to obtain robust results. I follow the strand of Beck and Katz (2001) by using Ordinary Least Squares (OLS) analysis with Panel-Corrected Standard Errors (PCSE). This is truly important when using short time-series, as most FDI-related analyses are, because other research methods such as Feasible Generalized Least Squares (FGLS) and regular OLS have a tendency to underestimate the standard errors and give the scholars over-confident results. Substantially, I will show that political scientists and economists should work more together to get a better understanding of FDI, as qualitative (and quantitative) research in the social sciences can understand the political environment in a better way than many economists, and this thesis shows that political and economic variables both affect countries attractiveness in FDI