How do effective taxation and institutions affect FDI nowadays?

Abstract We explore the effects of effective taxation and institutional quality on sectoral FDI. Our analysis includes European countries, using data from 2002 to 2020. Employing a GMM approach, we show that an increase in effective taxation reduces sectoral FDI flow. Among the institutional variables, tertiary enrolment attracts FDI, while secondary attainment has varying effects depending on the sector. Our findings suggest that governments should lower taxes to encourage more FDI flows and strengthen tertiary and secondary enrolment.