The effect of corporate tax rates on foreign direct investment in the context of tax competition

In today’s globalized world, tax systems play a crucial role in influencing where investors allocate capital. Some countries recognize the importance of tax policies for national competitiveness, while others lag behind. This study examines the effect of tax competition and selected macroeconomic indicators on foreign direct investment (FDI) inflows in the European Union (EU). Using the generalized method of moments (GMM), the analysis includes data from 24 EU member states between 2002 and 2022. The primary aim is to verify the relationship between corporate tax rates and FDI in the context of tax competition. First, an analysis was performed for all countries, followed by a regional analysis dividing them into Eastern and Western European blocs. The results suggest that the statutory corporate income tax rate (CIT) does not have an immediate effect on foreign direct investment (FDI) inflows; however, a negative effect emerges with a longer time lag in the overall sample. Eastern Europe shows sensitivity of FDI to higher CIT rates with a delay, while in the more developed Western European countries, such a relationship was not confirmed. These findings highlight the importance of considering regional specificities when designing tax policies aimed at attracting foreign investment.