51

To determine whether governments can affect foreign businesses' location choices, the impact of government expenditure (in subsidies or fixed capital), of the effective tax rate for these companies and of the assistance provided by the European Regional Development Fund is assessed. The effect of government spending on fixed capital in the host country in relation to that of other potential host countries turns out to be positive and significant. Although the estimated impact is comparatively limited, the presence of significant agglomeration forces suggest that temporary tax policies may have a permanent effect on the location of businesses. Furthermore, our empirical findings show that European integration has engendered a structural change, the stock of German direct investment having grown significantly since 1990.