Tax wedge the effect on direct foreign capital investments: The case of European Union

Foreign direct investment is an investment made by a firm or individual in one country to the businesses in another country. In general, foreign direct investment occurs when the investor establishes foreign business activities or acquires foreign operating assets in a foreign company. However, foreign direct investment differs from portfolio investments in which an investor only buys shares of foreign companies. Current globalization trends have differentiated the determinants of foreign capital investments. In this context, economic, political and political components, especially institutional factors, affect the choice of place in investments. Among these factors, especially tax factors are in a remarkable position recently. The differences between tax systems between countries affect both the profitability and spatial distribution of foreign capital investments. The most striking tax regulation in the recent period is the tax wedge, a measure of the relative tax burden imposed by a country on labor. This is because the tax burden on labor affects both the productivity of the labor market and changes the profitability of foreign investments. In this study, the effect of tax wedge on foreign direct investments was measured. The study considers the member states of the European Union as a sample. In order to measure the impact of the tax wedge on foreign direct investments, GDP, exchange rate and fixed investment expenditures were determined as the control variables. In the study, no significant relationship was found between the foreign direct investment and tax wedge in the European Union sample. In other words, it is observed that a tax regulation that increases labor costs in the sample countries is not an important decision input in the selection of investments. Keywords: Tax Wedge, Foreign Direct Investment, Static Panel.