Common Correlated Effects Estimation of the Relationship between Foreign Direct Investment and Welfare: A Case Study of Tax Havens in Europe

This study examines the relationship between FDI, corporate tax revenue, and welfare in six selected European tax havens: Belgium, Ireland, Luxembourg, Malta, the Netherlands, and Switzerland, using annual data from 1995-2023. Employing second-generation econometric methods (Fourier KPSS, ECM bootstrap cointegration, and CCEMG), the analysis finds that FDI in tax-haven economies is largely financialised and disconnected from real economic activity. Short-run results show no welfare gains from FDI or tax revenue. Long-run findings reveal strong heterogeneity: corporate tax revenue significantly improves welfare in Ireland and Switzerland, while FDI has weak or negative effects in Malta, Luxembourg, and the Netherlands, consistent with their role as financial hubs.