Analysis Of The Relevance Of Fiscal Decentralization In Ensuring Country Investment Attractiveness

Abstract

Over the last three decades, fiscal decentralization reform has become widespread in the world as one of the most effective tools for ensuring the efficient functioning of the public and local finances, as it involves the transfer of powers from central to local or regional levels of government under the principle of subsidiarity and more effective allocation of budgetary funds. However, despite the fact that the reform of fiscal decentralization is mainly aimed at a qualitative transformation of the functioning of the budgetary system, it is crucial to take into account the consequences and interrelations of this process with other components of economic policy and their target parameters when developing the concept and algorithm for its implementation. Thus, in particular, many empirical studies confirm the impact of fiscal federalism on country economic growth. However, it is also essential to identify the impact of reform on the parameters of the country investment attractiveness. In the article, empirical studies on the impact of decentralization on the country’s and region’s investment attractiveness indicators were analyzed. The analysis results revealed that this issue has not become widespread in the scientific literature, and the existing research does not allow a clear conclusion about the nature of the impact of decentralization on the parameters of investment activity. The paper provides panel data regression analysis in order to identify the impact of revenue and (cost) expenditure decentralization on net inflow of foreign direct investment, gross capital formation and business network density for a sample of 12 unitary European countries (Czech Republic, Denmark, Estonia, France, Hungary, Italy, Latvia, Lithuania, Poland, Slovak Republic, Slovenia, and Ukraine) for 2008-2018. According to the modeling results, it was found that the level of expenditure decentralization has a positive effect on the net inflow of foreign direct investment and business network density, negative – on the volume of gross capital formation. In contrast, revenue decentralization has no statistically significant effect on any of the performance parameters. Keywords: expenditure (cost) decentralization, revenue decentralization, investment attractiveness, investment activity, regression analysis.