The dynamics of the localization of FDI in the face of tax competition: Literature review

Abstract

The combined effects of economic and financial globalization, the strong integration of markets and the globalization of trade, have prompted countries to open up to international capital flows and to the increased mobility of economic agents as well as that of tangible and intangible. Moreover, FDI is one of the favored forms of MNCs to achieve their expansion. Admittedly, the changes that have permeated the business environment has largely contributed to the evolution of the dynamics of the forms of FDI localization, moving from commercial relocation to industrial relocation and then to financial relocation. However, the dynamics of the location of FDI is conditioned, with the evolution of the international business environment, by new determinants influencing the decision of such a choice. In this regard, the public authorities have implemented a range of measures to promote the competitiveness and attractiveness of their territories for FDI. Indeed, taxation is, among other things, one of the tools used by States to achieve this, and is thus subject to competition between them. In the light of the theoretical and empirical works consulted, we were able to deduce that taxation has a significant effect on the choice of location for FDI. This contribution aims to clarify the relationship between taxation and the attractiveness of territories, while reviewing the evolution of the dynamics of the forms of location of FDI with the evolution of the international environment of business. And finally to show to what extent agglomeration economies can counterbalance the effects of high tax rates and can therefore promote the attractiveness of a given territory for FDI.

JEL Classification: E62, F21, H54, H73

Paper type: Theoretical Research