Skip to main content
SpringerLink
Log in

The Effect of Foreign Direct Investment on Tax Revenue

  • Published:
Comparative Economic Studies Aims and scope Submit manuscript

Abstract

Internal resource mobilization remains a big challenge for developing countries. While many studies have attempted to highlight several strategies to increase tax revenues, the contribution of foreign direct investment (FDI) inflows in this process has received little attention. This paper provides an empirical answer to the crucial role of FDI inflows in tax revenue mobilization. Using a System GMM estimator for 90 developing countries from 1996 to 2017, our results strongly suggest that FDI inflows lead to a significant tax revenue increase. Nevertheless, this effect is not observed in resource-exporting countries where tax revenues seem statistically insensitive to FDI inflows.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Source Author’s calculation using data from UNU-WIDER and UNCTADst

Fig. 2

Source Author’s calculation using data from UNU-WIDER and UNCTADsta

Similar content being viewed by others

Notes

  1. UNCTADstat—documentation, available at https://unctadstat.unctad.org/wds/TableViewer/summary.aspx?ReportId=96740.

  2. https://www.bruegel.org/publications/datasets/real-effective-exchange-rates-for-178-countries-a-new-database/.

  3. Telerama (2011).

  4. We consider a country a natural-resource exporter if its exports of natural resources represent more than 60% of its total exports for more than ten years.

References

  • Anwar, S., and L.P. Nguyen. 2011. Foreign direct investment and trade: The case of Vietnam. Research in International Business and Finance 25(1): 39–52.

    Article  Google Scholar 

  • Arellano, M., and O. Bover. 1995. Another look at the instrumental variable estimation of error-components models. Journal of Econometrics 68(1): 29–51.

    Article  Google Scholar 

  • Arellano, M., and S. Bond. 1991. Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies 58(2): 277–297.

    Article  Google Scholar 

  • Aslam, A.M. 2015. A case study of cointegration relationship between tax revenue and foreign direct investment: Evidence from Sri Lanka. In 2nd international symposium, FIA, South Eastern University of Sri Lanka, 241, 251.

  • Bal, E., and B. Fazl. 2016. Does foreign capital increase tax revenue: The Turkish case. International Journal of Economics and Financial Issues 6(2): 776–781.

    Google Scholar 

  • Baunsgaard, T., and M. Keen. 2010. Tax revenue and (or?) trade liberalization. Journal of Public Economics 94(9): 563–577.

    Article  Google Scholar 

  • Bayar, Y., and O.F. Ozturk. 2018. Impact of foreign direct investment inflows on tax revenues in OECD countries: A panel cointegration and causality analysis. Theoretical and Applied Economics 25(1): 31–40.

    Google Scholar 

  • Becker, J., C. Fuest, and N. Riedel. 2012. Corporate tax effects on the quality and quantity of FDI. European Economic Review 56(8): 1495–1511.

    Article  Google Scholar 

  • Bénassy-Quéré, A., L. Fontagné, and A. Lahrèche-Révil. 2005. How does FDI react to corporate taxation? International Tax and Public Finance 12(5): 583–603.

    Article  Google Scholar 

  • Besley, T., and T. Persson. 2013. Taxation and development. In Handbook of public economics (Vol. 5, pp. 51–110). Elsevier.

  • Bird, R., and P.-P. Gendron. 2007. The VAT in developing and transitional countries. Cambridge Books.

    Book  Google Scholar 

  • Blundell, R., and S. Bond. 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87(1): 115–143.

    Article  Google Scholar 

  • Bornhorst, F., S. Gupta, and J. Thornton. 2009. Natural resource endowments and the domestic revenue effort. European Journal of Political Economy 25(4): 439–446.

    Article  Google Scholar 

  • Brun, J.F., G. Chambas, and J.L. Combes. 2005. Quel niveau de ressources publiques en Afrique sub-saharienne. Afrique Au Sud Du Sahara: Mobiliser Des Ressources Sur Le Développement, Ed G. Chambas, Economica, Paris.

  • Bunescu, L., and C. Comaniciu. 2014. Analysis of correlation between tax revenues and other economic indicators in European Union Member States. Studies in Business and Economics 9(1): 24–34.

    Google Scholar 

  • Chambas, G. 2005. Afrique au Sud du Sahara: Mobiliser des ressources fiscales pour le développement. http://www.africabib.org/rec.php?RID=312962037.

  • Cnossen, S. 2015. Mobilizing VAT revenues in African countries. International Tax and Public Finance 22(6): 1077–1108.

    Article  Google Scholar 

  • Danielova, A., and S. Sarkar. 2011. The effect of leverage on the tax-cut versus investment-subsidy argument. Review of Financial Economics 20(4): 123–129.

    Article  Google Scholar 

  • Devereux, M.P., and H. Freeman. 1995. The impact of tax on foreign direct investment: Empirical evidence and the implications for tax integration schemes. International Tax and Public Finance 2(1): 85–106.

    Article  Google Scholar 

  • Dunning, J.H. 1993. MNEs, the balance of payments and the structure of trade. Multinational enterprises and the global economy. Addison-Wesley.

    Google Scholar 

  • Ehrhart, H. 2011. Assessing the relationship between democracy and domestic taxes in developing countries.

  • Fox, W.F., and T. Gurley. 2005. An exploration of tax patterns around the world. Tax Notes International 37(9): 793–805.

    Google Scholar 

  • Fuest, C., and N. Riedel. 2009. Tax evasion, tax avoidance and tax expenditures in developing countries: A review of the literature. Report Prepared for the UK Department for International Development (DFID) (pp. 1–69).

  • Gajigo, O., E. Mutambatsere, and G. Mdiaye. 2012. Gold mining in Africa: Maximizing economic returns for countries (Vol. 147). Citeseer.

    Google Scholar 

  • Gnangnon, S.K. 2017. Impact of foreign direct investment (FDI) inflows on non-resource tax and corporate tax revenue”. Economics Bulletin 37(4): 2890–2904.

    Google Scholar 

  • Gnangnon, S.K., and J.-F. Brun. 2017. Impact of export upgrading on tax revenue in developing and high-income countries. Oxford Development Studies 45(4): 542–561.

    Article  Google Scholar 

  • Gropp, R., and K. Kostial. 2000. The disappearing tax base: Is foreign direct investment eroding corporate income taxes?

  • Gropp, R., and K. Kostial. 2001. FDI and corporate tax revenue: Tax harmonization or competition? Finance and Development 38(2): 10–10.

    Google Scholar 

  • Gupta, A.S. 2007. Determinants of tax revenue efforts in developing countries. International Monetary Fund.

  • International Monetary Fund Staff. 2011. Regional Economic Outlook, October 2011: Sub-Saharan Africa, Sustaining the Expansion. International Monetary Fund Stationery Office, The distributor. http://public.ebookcentral.proquest.com/choice/publicfullrecord.aspx?p=1587279.

  • Islam, M.R., J.B. Madsen, and H. Doucouliagos. 2018. Does inequality constrain the power to tax? Evidence from the OECD. European Journal of Political Economy 52: 1–17.

    Article  Google Scholar 

  • Keen, M., and A. Simone. 2004. Is tax competition harming developing countries more than developed? Tax Notes International 34(13): 1317–1326.

    Google Scholar 

  • Kraay, A., D. Kaufmann, and M. Mastruzzi. 2010. The worldwide governance indicators: Methodology and analytical issues. The World Bank.

  • Leuthold, J.H. 1991. Tax shares in developing economies a panel study. Journal of Development Economics 35(1): 173–185.

    Article  Google Scholar 

  • Loretz, S. 2008. Corporate taxation in the OECD in a wider context. Oxford Review of Economic Policy 24(4): 639–660.

    Article  Google Scholar 

  • Mahmood, H., and A.R. Chaudhary. 2013. Impact of FDI on tax revenue in Pakistan. Pakistan Journal of Commerce and Social Sciences 7(1): 59–69.

    Google Scholar 

  • Nguyen, H.T.T., M.H. Nguyen, and A. Goenka. 2014. How does FDI affect corporate tax revenue of the host country. Document De Recherche Epee, Centre D’etudes Des Politiques Economiques De L’universite D’evry, Retrieved August, 10, 13–03.

  • Nickell, S. 1981. Biases in dynamic models with fixed effects. Econometrica: Journal of the Econometric Society 49: 1417–1426.

    Article  Google Scholar 

  • Okey, M.K.N. 2013. Tax revenue effect of foreign direct investment in West Africa. African Journal of Economic and Sustainable Development 2(1): 1–22.

    Article  Google Scholar 

  • Peyer, C., and Y. Maillard. 2011. Contrats, droits humains et fiscalité: Comment une entreprise dépouille un pays. Le cas de Glencore en République Démocratique du Congo. Pain pour le prochain/Action de Carême. Mars.

  • Pickering, A., and S. Rajput. 2018. Inequality and the composition of taxes. International Tax and Public Finance 25(4): 1001–1028.

    Article  Google Scholar 

  • Raff, H., and K. Srinivasan. 1998. Tax incentives for import-substituting foreign investment: Does signaling play a role? Journal of Public Economics 67(2): 167–193.

    Article  Google Scholar 

  • Rochananonda, C. 2006. Tax incentives and FDI in Thailand. Paper Prepared.

  • Roodman, D. 2009a. A note on the theme of too many instruments. Oxford Bulletin of Economics and Statistics 71(1): 135–158.

    Article  Google Scholar 

  • Roodman, D. 2009b. How to do xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal 9(1): 86–136.

    Article  Google Scholar 

  • Stotsky, M.J.G., and M.A. WoldeMariam. 1997. Tax Effort in Sub-Saharan Africa. IMF Working Paper, 57.

  • Svirydzenka, K. 2016. Introducing a new broad-based index of financial development.

  • Tabasam, F. 2014. Impact of foreign capital inflows on tax collection: A case study of Pakistan. Issues 2(2): 202–212.

    Google Scholar 

  • Telerama. 2011. Zambie: À qui profite le cuivre? https://www.youtube.com/watch?v=EAWASJwQJC8andfeature=emb_logo

  • Udomkerdmongkol, M., O. Morrissey, and H. Görg. 2009. Exchange rates and outward foreign direct investment: US FDI in emerging economies. Review of Development Economics 13(4): 754–764.

    Article  Google Scholar 

  • UNCTAD (Ed.). 2003. FDI policies for development: National and international perspectives. United Nations.

  • UNCTAD, G. 2012. World investment report: Towards a new generation of investment policies. Unite Nations. New York and Geneva.

  • UNCTADstat—Documentation. n.d. Retrieved 22 May 2019, from https://unctadstat.unctad.org/wds/TableViewer/summary.aspx?ReportId=96740.

  • UNU-WIDER Government Revenue Dataset. 2020. https://www.wider.unu.edu/project/government-revenue-dataset.

  • Yogo, U.T., and M.M. Ngo Njib. 2018. Political competition and tax revenues in developing countries. Journal of International Development 30(2): 302–322.

    Article  Google Scholar 

  • Zee, H.H., J.G. Stotsky, and E. Ley. 2002. Tax incentives for business investment: A primer for policy makers in developing countries. World Development 30(9): 1497–1516.

    Article  Google Scholar 

  • Zhang, K.H. 2001. How does foreign direct investment affect economic growth in China? Economics of Transition 9(3): 679–693.

    Article  Google Scholar 

Download references

Acknowledgements

We thank the editor and one anonymous referee, in addition Mary Françoise RENARD, for useful comments and suggestions. We are also grateful to Narcisse Cha N’Gom, and Andre Gbato for their useful discussions. This work was supported by the LABEX IDGM+ (ANR-10-LABX-14-01) within the program “Investissements d’Avenir” operated by the French National Research Agency (ANR).

Author information

Authors and Affiliations

  1. University Clermont Auvergne, CNRS, IRD, CERDI, 26 Avenue Léon Blum, 63000, Clermont-Ferrand, France

    Abdramane Camara

Authors
  1. Abdramane Camara
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Abdramane Camara.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Camara, A. The Effect of Foreign Direct Investment on Tax Revenue. Comp Econ Stud 65, 168–190 (2023). https://doi.org/10.1057/s41294-022-00195-2

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/s41294-022-00195-2

Keywords

JEL Classification

Search

Navigation