Profit Shifting opportunities, Multinationals, and the determinants of FDI

The theory of tax competition suggests that different tools might
be used to attract physical capital and taxable profits. While it
is assumed that FDI in real activity is deterred by high effective
taxes, investment undertaken for purpose of profit-shifting is
deterred by a higher statutory tax rate. Using information from the
RWI-Database "Globalisation", which contains statistics about
foreign engagements of the most important German enterprises, this
paper investigates if this assumption holds in reality.
Differentiating between the functional form of engagement and using
a linear regression, the analysis provides evidence that FDI in
real activity (production) is correlated with effective tax rates
while FDI that implies more opportunities for profit shifting
activities (service, finance and R&D) is correlated with the
tatutory tax rate.