Ann Reg Sci (2008) 42:413–423 DOI 10.1007/s00168-007-0158-y ORIGINAL PAPER Foreign direct investment, industrial location and capital taxation Luis Lanaspa · Fernando Pueyo · Fernando Sanz Received: 15 November 2005 / Accepted: 15 June 2007 / Published online: 11 September 2007 © Springer-Verlag 2007 Abstract This paper demonstrates from a theoretical point of view that governments can affect the location decision of firms using tax rate on capital income as a policy instrument. We find that, in general, countries with a lower tax burden are net receivers of foreign direct investment. Furthermore, fiscal pressure interacts with the quality of infrastructures to exert a combined influence on the equilibrium location of the firms. JEL Classification F21 · H73 · R12 1 Introduction The increasing liberalisation of international capital mobility has intensified the debate, at both academic level and amongst public entities, on the effects that capital taxation has over its spatial location. The empirical works of Hartman (1984), Boskin and Gale (1987), Slemrod (1990), Swenson (1994) and Devereux and Griffith (1998), amongst others, have made it clear that the location and investment decisions made by firms are not neutral in the face of the different tax rates that are levied in different coun- tries. The relative abundance of applied works that confirm the importance of tax rates contrasts with the absence of theoretical works undertaken in this area. Against this background, the aim of this paper is precisely to contribute towards remedying this Financial support from FEDER and project BEC2003-02271 is gratefully acknowledged. L. Lanaspa · F. Pueyo · F. Sanz Departamento de Análisis Económico, Universidad de Zaragoza, Zaragoza, Spain L. Lanaspa (B ) Facultad de Ciencias Económicas, Universidad de Zaragoza, Gran Vía, 2, 50005 Zaragoza, Spain e-mail: llanas@unizar.es 123