New ESRI Research Examines the Impact of Corporate Taxation on Attracting Foreign Direct Investment to Ireland and Other EU Countries
Today, Tuesday 14 June, the ESRI published new research titled Corporate Taxation and Foreign Direct Investment in EU Countries: Policy Implications for Ireland, examining the impact of corporate taxation and other factors on the attractiveness of Ireland and other EU countries to foreign direct investment (FDI). In this context, the extent to which Ireland and the UK are perceived as similar alternatives with respect to factors that determine the location choice of foreign affiliates is also analysed.
- On average, all else being equal, lower corporate tax rates increase the attractiveness of EU countries to FDI. However, over and above the effect of corporate tax rates, a number of other location characteristics are found to significantly increase countries’ chances of being chosen as a location for FDI, including market size, access to the European Single Market, low production costs, high R&D capacity, as well as cultural and geographical proximity relative to investors.
- EU and non-EU investors value location characteristics differently. Investors from outside the EU are mainly seeking access to the European Single Market and are more likely to choose locations with low corporate tax rates. Intra-EU investments are more likely to be located in countries where the corporate tax is high but where they benefit from other local advantages such as low production costs.
- Ireland and the UK are perceived to be similar as alternative locations for FDI in particular by investors from outside the EU and for FDI in the services sector. This result suggests that a possible redirection of FDI from the UK to Ireland in the case of Brexit would be more likely by investors from outside the EU and in the services sector.
Policy Implications for Ireland
- Policy analysis based on these research results indicate that the sensitivity of Ireland’s attractiveness to FDI with respect to changes in its corporate tax rate is the highest among all EU countries in the case of FDI projects by investors from outside the EU. Assuming all other location characteristics would remain unchanged, a one percentage point increase in Ireland’s statutory corporate tax rate (from 12.5 per cent to 13.5 per cent) would reduce its chance to be chosen as a location for new FDI projects from non-EU countries by 4.6 per cent.
- A more competitive tax rate in the UK would reduce Ireland’s attractiveness to FDI especially in the case of FDI by investors from outside the EU. A reduction by one percentage point of the corporate tax rate in the UK (from 20 per cent to 19 per cent) is associated with a reduction of Ireland’s probability to be chosen as a location for new FDI projects from non-EU countries by 4.3 per cent.
- Taken together, these research results indicate that a competitive corporate tax rate is a significant factor in attracting FDI to Ireland especially from countries outside the EU. This research concludes that in addition to maintaining a competitive corporate tax rate, Ireland’s attractiveness to FDI would benefit from policies aimed at maintaining cost competitiveness and enabling further R&D investment.