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Federalism, weak institutions and the competition for foreign direct investment

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Abstract

This paper shows that vertical fiscal inefficiencies impede federally organized countries in successfully attracting foreign direct investment. Such countries, particularly if characterized by weak institutions, are disadvantaged in the process of bidding for firms and in their ability to commit to a low overall tax burden. The interaction of these problems deteriorates their competitive position vis-à-vis unitary states in the competition for foreign direct investment. These theoretical considerations are in line with recent empirical evidence that suggests that the number of government layers of host countries has significant and sizeable negative effects on the amount of foreign direct investment inflows.

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Authors and Affiliations

  1. European Commission, Brussels, Belgium

    Sebastian G. Kessing

  2. Social Science Research Center (WZB), Berlin, Germany

    Kai A. Konrad

  3. Department of Economics, Free University of Berlin, Berlin, Germany

    Kai A. Konrad

  4. Department of Economics, University of Exeter, Exeter, UK

    Christos Kotsogiannis

Authors
  1. Sebastian G. Kessing
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  2. Kai A. Konrad
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  3. Christos Kotsogiannis
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Correspondence to Sebastian G. Kessing.

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Kessing, S.G., Konrad, K.A. & Kotsogiannis, C. Federalism, weak institutions and the competition for foreign direct investment. Int Tax Public Finance 16, 105–123 (2009). https://doi.org/10.1007/s10797-007-9058-4

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