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International Tax and Public Finance

, Volume 16, Issue 1, pp 105–123 | Cite as

Federalism, weak institutions and the competition for foreign direct investment

  • Sebastian G. Kessing
  • Kai A. Konrad
  • Christos Kotsogiannis
Article

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.

Keywords

Foreign direct investment Hold-up problem Federalism Vertical tax competition Bidding for firms Tax base cooccupation 

JEL

F34 F42 H11 H71 H77 

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Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  • Sebastian G. Kessing
    • 1
  • Kai A. Konrad
    • 2
    • 3
  • Christos Kotsogiannis
    • 4
  1. 1.European CommissionBrusselsBelgium
  2. 2.Social Science Research Center (WZB)BerlinGermany
  3. 3.Department of EconomicsFree University of BerlinBerlinGermany
  4. 4.Department of EconomicsUniversity of ExeterExeterUK

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