Choice of location for Foreign Direct Investment by multinational corporations: Do tax burden matter?

https://doi.org/10.35912/ijfam.v3i4.733
Published: Mar 11, 2022

Abstract:

Purpose: This paper investigated the effect of the tax burden on the inflow of FDI into the continent. The study employed a panel data set of 48 SSA countries covering a period of 2009 to 2018.

Research methodology: In other to account for the endogeneity problems associated with most financial data, we employed a dynamic panel two-step-system-GMM.

Results: The result indicates that tax burden is a negative determinant of the inflow of FDI. In other words, multinational corporations attach a significant premium to countries with low tax burdens than those with a high tax burden. Similarly, an increase in the mobility of labour is a negative determinant of the inflow of FDI into the continent. All the economic and financial freedom indices included in the model have a positive and significant influence on the inflow of FDI into the continent. A sustainable tax policy that will lessen the tax burden on foreign investors should be formulated to enhance the inflow of FDI into the continent.

Limitations: This study employed Dynamic System GMM which can produce variant results depending on the choice of instrument.

Contribution: This study provides insight on the role of fiscal policy particularly taxation in explaining the inflow of FDI. Policymakers, multinational corporations, and other players in the global FDI market will appreciate the influence that tax exerts on FDI inflow.

Keywords:
1. FDI
2. Financial freedom
3. Investment freedom
4. Labour freedom
5. Monetary freedom
6. Tax burden
Authors:
1 . Evelyn Bassey
Department of Banking and Finance, Godfrey Okoye University, Enugu, Nigeria
2 . Blessing Ndidiamaka Amobi
Department of Accountancy, University of Nigeria Nsukka, Enugu, Nigeria
3 . Anthony Nwabuisi Okorie
Department of Accountancy, Enugu State University of Science and Technology, Enugu, Nigeria
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How to Cite
Bassey, E., Amobi, B. N., & Okorie, A. N. (2022). Choice of location for Foreign Direct Investment by multinational corporations: Do tax burden matter?. International Journal of Financial, Accounting, and Management, 3(4), 349–358. https://doi.org/10.35912/ijfam.v3i4.733
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Issue & Section
Vol. 3 No. 4 (2022): March
Articles
References

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    Ait Soussane, J. & Mansouri, Z. (2020). Impact of tax policy in sub-Saharan territories on Moroccan FDI: An econometric cointegrating panel modelling experiment. Alternatives Managériales Economiques, 2(1), 156–168. https://revues.imist.ma/index.php/AME/article/view/19441/10612

    Appiah-Kubi, S. N. K., Malec, K., Phiri, J., Maitah, M., Gebeltová, Z., Smutka, L., Blazek, V., Maitah, K., & Sirohi, J. (2021). Impact of Tax Incentives on Foreign Direct Investment: Evidence from Africa. Sustainability, 13(15), 8661. https://doi.org/10.3390/su13158661

    Arellano, M. and S.R. Bond (1991), Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations, Review of Economic Studies, 58, 277-297

    Banović, I., Blažić, H., & Drezgić, S. (2020). The impact of the corporate income tax on the fdi flows in the EU member countries. Journal of the Polytechnic of Rijeka, 8(1), 41–58. https://doi.org/10.31784/zvr.8.1.3

    Barrios, S., Huizinga, H., Laeven, L. and Nicodème, G. (2012) International taxation and multinational firm location decisions, Journal of Public Economics, 96(11,12), pp.946–958

    Bellak C. and Leibrecht M. (2009) Do low corporate income tax rates attract FDI? – Evidence from Eight Central- and East European Countries, Applied Economics, 41, pp.2691–2703

    Blundell, R.W. and S.R. Bond (1998), Initial conditions and moment restrictions in dynamic panel data models, Journal of Econometrics, 87, 115-143.

    Chakrabarti A. (2001) The determinant of foreign direct investment: Sensitivity analysis of cross-country regression. Kyklos 54(1) pp. 89-114

    Chigora, F., Kapesa, T., & Svongoro, P. (2021). Revisiting nation branding: An infrastructure financing perspective in Zimbabwe. International Journal of Financial, Accounting, and Management, 3(2), 179-192. https://doi.org/10.35912/ijfam.v3i2.611

    Cung and Hua (2013) Tax burden and foreign direct investment: Theory and Practice in Vietnam. Advances in Management & Applied Economics, 3(3), pp. 85-103

    Desai, M.A., C.F. Foley and J.R. Hines (2004): Foreign direct investment in a world of multiple taxes. Journal of Public Economics 88, 2727-2744

    Djankov, S., Ganser, T., Ramalho, R. & Shleifer, A., (2010). The effect of corporate taxes on investment and entrepreneurship. American Economic Journal: Macroeconomics, 2(3), pp. 31-64.

    Drapkin, I. M. (2020). The Influence of Taxes on Inflows and Outflows of Foreign Direct Investment. Journal of Tax Reform, 6(3), 244–255. https://doi.org/10.15826/jtr.2020.6.3.084

    Echandi, R., J. Krajcovicova, and C. Z. W. Qiang. (2015). The Impact of Investment Policy in a Changing Global Economy: A Review of the Literature. Policy Research Working Paper 7437, World Bank, Washington, DC

    Edo, O.C., Okafor, A., Akihgbodemhe E.J., (2020) Corporate Taxes and Foreign Direct Investments: An Impact Analysis. Public Policy and Administration Research. 10(9).

    Esteller-Moré, A., Rizzo, L., & Secomandi, R. (2020). The heterogeneous impact of taxation on FDI: A note on Djankov et al. (2010). Economics Letters, 186, 108775. https://doi.org/10.1016/j.econlet.2019.108775

    Gao, M. & Liu, X. (2021). Tax Burden, Institutional Environment and Foreign Direct Investment Flow: From the Perspective of Asymmetric International Tax Competition. China Finance and Economic Review, 10(1), 66-85. https://doi.org/10.1515/cfer-2021-0004

    Gropp R. and Kostia K. (2000) The determinants of Tax Base: is foreign direct investment eroding corporate income tax? IMF Working Paper. WP/00/173

    Hansen, L. P. (1982). Large sample properties of generalized method of moments estimators. Econometrica 50:1029–1054

    Hansson A. and Olofsdotter K. (2010); Tax differences and foreign direct investment in the EU27. Department of Economics, Lund University,

    Hebous, S., Ruf, M. and Weichenrieder, A.J. (2010) The effects of taxation on the location decision of multinational firms: M&A vs. greenfield investments, CESifo Working Paper Series [online] https://ideas.repec.org/p/ces/ceswps/_3076.html (accessed 10 June 2021).

    Hines, James R. (2017). Business tax burdens and tax reform. Brookings Papers on Economic Activity, Economic Studies Program. The Brookings Institution, 48(2) (Fall): 449-471. https://www.brookings.edu/wp-content/uploads/2018/02/hinestextfa17bpea.pdf.

    Hong J. (2011) The role of tax in the foreign direct investment decision process: Evidence from UK firms. Unpublished Doctor of Philosophy Project Submitted at Sheffield University.

    Hunady J. and Orviska M. (2014) Determinants of Foreign Direct Investment in EU countries-Do Corporate tax really matter? Procedia Economics and Finance. 12 pp. 243-250

    James, S. (2013). Tax and non-tax incentives and investments: Evidence and policy implications. Washington, DC: World Bank.

    Kiburi, W.W, Mirie M.W.,, Okiro, O.K., and Ruig, G.M, (2018) Effects of tax burden on foreign direct investment inflows into the East African Community Countries: Empirical Evidence. Journal of Finance & Accounting 2(3) PP-1-14

    Korytin, A. V. (2020). Tax Burden Influence on the Foreign Direct Investment Distribution by Economic Industries. Financial Journal, 12(1), 68–86. https://doi.org/10.31107/2075-1990-2020-1-68-86.

    Kubicova J. (2013) The role of corporate income tax in foreign direct investment inflow into Old and New EU member states, 14th In Poloucke S. and Stavarek D. (Ed) Financial Regulation and Supervision in After-Crisis period. Proceeding of 13th International Conference on Finance and Banking Karvina: Silesian University Business Administration pp. 222-233.

    Mercer-Blackman V. and Camingue-Romance S. (2020) The impact of United States Tax Policies on sectorial Foreign Direct Investment to Asia. ADB Economics Working Paper Series No. 628

    Morisset, Jacques, and Neda Pirnia. (2001). How tax policy and incentives affect foreign direct investment: A review. Mimeo. Foreign Investment Advisory Service (FIAS), a joint service of the International Finance Corporation and the World Bank

    Mudenda L. D (2015) Corporate Income Tax Rate and Foreign Direct Investment, The Case of Southern African Economies. UMEA University research paper. 15ECTS

    Muhammad Ahmad, M., & Dahalan, J. (2020). Not aid, but trade - an application of ARDL bound test for Pakistan economy. International Journal of Financial, Accounting, and Management, 2(1), 51-64. https://doi.org/10.35912/ijfam.v2i1.155

    Negeri, K. G., and Halemariam, D. (2016) Effect of health development assistance on health status in Sub-saharan Africa, Risk Management and Healthcare Policy, 9, 33-42.

    Nerudova, D., (2008), Tax harmonization in the EU, Acta Universitatis, p. 139.

    OECD (2020) http://www.oecd.org/daf/inv/investment-policy/investmentnews.htm

    Ojeka, S.A., Kelobo, O.F., Ajetumobi, O., Dahunsi, O., and Adegboye, A. (2021) Tax rates and foreign direct investments in Sub-Sahara Africa. European Journal of Accounting, Auditing and Finance Research. 9(5). pp 1-15 Roodman, D. (2009), A note on the theme of too many instruments, Oxford Bulletin of Economics and Statistics, 71, 135-158

    Parys S.V (2012) The effectiveness of tax incentives in attracting investment: Evidence from developing countries. De Boeck Supérieur, 3; pp 192-141. DOI: 10.3917/rpve.511.0129

    Pavel, J., Tepperová, J., & Arltová, M. (2020). Tax factors affecting FDI allocation in the EU post-socialist states. Post-Communist Economies, 33(6), 1–16. https://doi.org/10.1080/14631377.2020.1827198

    Smith, J.S. (2019). International trade promotion methods for SMEs in low and lower-middle-income economies. International Journal of Financial Accounting and Management, 1(2), 105-118. https://doi.org/10.35912/ijfam.v1i2.108

    Uwuigbe, R.O., Omoyiola, A., Uwuigbe, U., Lanre, N., & Ajetunmobi, O. (2019). Taxation, exchange rate and foreign direct investment in Nigeria. Banks and Bank Systems, 14(3), 76–85. https://doi.org/10.21511/bbs.14(3).2019.07

    Wolff G.B (2006) Foreign direct investment in the enlarged EU: do taxes matter and to what extent? Deutsche Bundes bank Discussion Paper No. 13

    Zulaecha, H. E., & Murtanto. (2019). Foreign ownership and sustainability performance in Indonesia. International Journal of Financial, Accounting, and Management, 1(1), 1-15. https://doi.org/10.35912/ijfam.v1i1.39

  1. Abdellatif, M.M., Edi, A.G., and Abdel-Salam, A. G (2021) The Relevance of Supply-Side Taxation for Attracting Foreign Direct Investment to Developing Countries: Evidence from Egypt. eJournal of Tax Research. 19(1), pp. 1-16.
  2. Ait Soussane, J. & Mansouri, Z. (2020). Impact of tax policy in sub-Saharan territories on Moroccan FDI: An econometric cointegrating panel modelling experiment. Alternatives Managériales Economiques, 2(1), 156–168. https://revues.imist.ma/index.php/AME/article/view/19441/10612
  3. Appiah-Kubi, S. N. K., Malec, K., Phiri, J., Maitah, M., Gebeltová, Z., Smutka, L., Blazek, V., Maitah, K., & Sirohi, J. (2021). Impact of Tax Incentives on Foreign Direct Investment: Evidence from Africa. Sustainability, 13(15), 8661. https://doi.org/10.3390/su13158661
  4. Arellano, M. and S.R. Bond (1991), Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations, Review of Economic Studies, 58, 277-297
  5. Banovi?, I., Blaži?, H., & Drezgi?, S. (2020). The impact of the corporate income tax on the fdi flows in the EU member countries. Journal of the Polytechnic of Rijeka, 8(1), 41–58. https://doi.org/10.31784/zvr.8.1.3
  6. Barrios, S., Huizinga, H., Laeven, L. and Nicodème, G. (2012) International taxation and multinational firm location decisions, Journal of Public Economics, 96(11,12), pp.946–958
  7. Bellak C. and Leibrecht M. (2009) Do low corporate income tax rates attract FDI? – Evidence from Eight Central- and East European Countries, Applied Economics, 41, pp.2691–2703
  8. Blundell, R.W. and S.R. Bond (1998), Initial conditions and moment restrictions in dynamic panel data models, Journal of Econometrics, 87, 115-143.
  9. Chakrabarti A. (2001) The determinant of foreign direct investment: Sensitivity analysis of cross-country regression. Kyklos 54(1) pp. 89-114
  10. Chigora, F., Kapesa, T., & Svongoro, P. (2021). Revisiting nation branding: An infrastructure financing perspective in Zimbabwe. International Journal of Financial, Accounting, and Management, 3(2), 179-192. https://doi.org/10.35912/ijfam.v3i2.611
  11. Cung and Hua (2013) Tax burden and foreign direct investment: Theory and Practice in Vietnam. Advances in Management & Applied Economics, 3(3), pp. 85-103
  12. Desai, M.A., C.F. Foley and J.R. Hines (2004): Foreign direct investment in a world of multiple taxes. Journal of Public Economics 88, 2727-2744
  13. Djankov, S., Ganser, T., Ramalho, R. & Shleifer, A., (2010). The effect of corporate taxes on investment and entrepreneurship. American Economic Journal: Macroeconomics, 2(3), pp. 31-64.
  14. Drapkin, I. M. (2020). The Influence of Taxes on Inflows and Outflows of Foreign Direct Investment. Journal of Tax Reform, 6(3), 244–255. https://doi.org/10.15826/jtr.2020.6.3.084
  15. Echandi, R., J. Krajcovicova, and C. Z. W. Qiang. (2015). The Impact of Investment Policy in a Changing Global Economy: A Review of the Literature. Policy Research Working Paper 7437, World Bank, Washington, DC
  16. Edo, O.C., Okafor, A., Akihgbodemhe E.J., (2020) Corporate Taxes and Foreign Direct Investments: An Impact Analysis. Public Policy and Administration Research. 10(9).
  17. Esteller-Moré, A., Rizzo, L., & Secomandi, R. (2020). The heterogeneous impact of taxation on FDI: A note on Djankov et al. (2010). Economics Letters, 186, 108775. https://doi.org/10.1016/j.econlet.2019.108775
  18. Gao, M. & Liu, X. (2021). Tax Burden, Institutional Environment and Foreign Direct Investment Flow: From the Perspective of Asymmetric International Tax Competition. China Finance and Economic Review, 10(1), 66-85. https://doi.org/10.1515/cfer-2021-0004
  19. Gropp R. and Kostia K. (2000) The determinants of Tax Base: is foreign direct investment eroding corporate income tax? IMF Working Paper. WP/00/173
  20. Hansen, L. P. (1982). Large sample properties of generalized method of moments estimators. Econometrica 50:1029–1054
  21. Hansson A. and Olofsdotter K. (2010); Tax differences and foreign direct investment in the EU27. Department of Economics, Lund University,
  22. Hebous, S., Ruf, M. and Weichenrieder, A.J. (2010) The effects of taxation on the location decision of multinational firms: M&A vs. greenfield investments, CESifo Working Paper Series [online] https://ideas.repec.org/p/ces/ceswps/_3076.html (accessed 10 June 2021).
  23. Hines, James R. (2017). Business tax burdens and tax reform. Brookings Papers on Economic Activity, Economic Studies Program. The Brookings Institution, 48(2) (Fall): 449-471. https://www.brookings.edu/wp-content/uploads/2018/02/hinestextfa17bpea.pdf.
  24. Hong J. (2011) The role of tax in the foreign direct investment decision process: Evidence from UK firms. Unpublished Doctor of Philosophy Project Submitted at Sheffield University.
  25. Hunady J. and Orviska M. (2014) Determinants of Foreign Direct Investment in EU countries-Do Corporate tax really matter? Procedia Economics and Finance. 12 pp. 243-250
  26. James, S. (2013). Tax and non-tax incentives and investments: Evidence and policy implications. Washington, DC: World Bank.
  27. Kiburi, W.W, Mirie M.W.,, Okiro, O.K., and Ruig, G.M, (2018) Effects of tax burden on foreign direct investment inflows into the East African Community Countries: Empirical Evidence. Journal of Finance & Accounting 2(3) PP-1-14
  28. Korytin, A. V. (2020). Tax Burden Influence on the Foreign Direct Investment Distribution by Economic Industries. Financial Journal, 12(1), 68–86. https://doi.org/10.31107/2075-1990-2020-1-68-86.
  29. Kubicova J. (2013) The role of corporate income tax in foreign direct investment inflow into Old and New EU member states, 14th In Poloucke S. and Stavarek D. (Ed) Financial Regulation and Supervision in After-Crisis period. Proceeding of 13th International Conference on Finance and Banking Karvina: Silesian University Business Administration pp. 222-233.
  30. Mercer-Blackman V. and Camingue-Romance S. (2020) The impact of United States Tax Policies on sectorial Foreign Direct Investment to Asia. ADB Economics Working Paper Series No. 628
  31. Morisset, Jacques, and Neda Pirnia. (2001). How tax policy and incentives affect foreign direct investment: A review. Mimeo. Foreign Investment Advisory Service (FIAS), a joint service of the International Finance Corporation and the World Bank
  32. Mudenda L. D (2015) Corporate Income Tax Rate and Foreign Direct Investment, The Case of Southern African Economies. UMEA University research paper. 15ECTS
  33. Muhammad Ahmad, M., & Dahalan, J. (2020). Not aid, but trade - an application of ARDL bound test for Pakistan economy. International Journal of Financial, Accounting, and Management, 2(1), 51-64. https://doi.org/10.35912/ijfam.v2i1.155
  34. Negeri, K. G., and Halemariam, D. (2016) Effect of health development assistance on health status in Sub-saharan Africa, Risk Management and Healthcare Policy, 9, 33-42.
  35. Nerudova, D., (2008), Tax harmonization in the EU, Acta Universitatis, p. 139.
  36. OECD (2020) http://www.oecd.org/daf/inv/investment-policy/investmentnews.htm
  37. Ojeka, S.A., Kelobo, O.F., Ajetumobi, O., Dahunsi, O., and Adegboye, A. (2021) Tax rates and foreign direct investments in Sub-Sahara Africa. European Journal of Accounting, Auditing and Finance Research. 9(5). pp 1-15 Roodman, D. (2009), A note on the theme of too many instruments, Oxford Bulletin of Economics and Statistics, 71, 135-158
  38. Parys S.V (2012) The effectiveness of tax incentives in attracting investment: Evidence from developing countries. De Boeck Supérieur, 3; pp 192-141. DOI: 10.3917/rpve.511.0129
  39. Pavel, J., Tepperová, J., & Arltová, M. (2020). Tax factors affecting FDI allocation in the EU post-socialist states. Post-Communist Economies, 33(6), 1–16. https://doi.org/10.1080/14631377.2020.1827198
  40. Smith, J.S. (2019). International trade promotion methods for SMEs in low and lower-middle-income economies. International Journal of Financial Accounting and Management, 1(2), 105-118. https://doi.org/10.35912/ijfam.v1i2.108
  41. Uwuigbe, R.O., Omoyiola, A., Uwuigbe, U., Lanre, N., & Ajetunmobi, O. (2019). Taxation, exchange rate and foreign direct investment in Nigeria. Banks and Bank Systems, 14(3), 76–85. https://doi.org/10.21511/bbs.14(3).2019.07
  42. Wolff G.B (2006) Foreign direct investment in the enlarged EU: do taxes matter and to what extent? Deutsche Bundes bank Discussion Paper No. 13
  43. Zulaecha, H. E., & Murtanto. (2019). Foreign ownership and sustainability performance in Indonesia. International Journal of Financial, Accounting, and Management, 1(1), 1-15. https://doi.org/10.35912/ijfam.v1i1.39