TAX OBLIGATIONS AND FOREIGN DIRECT INVESTMENT: NEW … · 2018-11-27 · tax obligations and foreign direct investment: new evidence from sub-saharan africa francis k. andoh(phd)

TAXOBLIGATIONSANDFOREIGNDIRECT

INVESTMENT:NEWEVIDENCEFROMSUB-SAHARANAFRICA

FRANCISK.ANDOH (PHD)DEPARTMENTOFAPPLIEDECONOMICS

SCHOOLOFECONOMICS

WILLIAMG.CANTAH(PHD)DEPARTMENTOFDATASCIENCEANDECONOMICPOLICY

SCHOOLOFECONOMICS

BACKGROUNDØThe role of FDI to economic development is welldocumented in the literature (see Hansen & Rand,2006)ØDespite its importance, FDI flows to SSA has beendeclining over the past decades.ØThe falling trends in FDI flows to Africa raises animportant question of what attracts and retainsFDI?

14/11/2018 TAXOBLIGATIONSANDFOREIGNDIRECTINVESTMENT 2

2007 2008 2009 2012 2013 2014 2015 2016 2017

47.2

36.2

-18.9-5.7 -2.2 -0.1 -6.9 -3.5

0.1

AFRICA

BACKGROUND

ØThe eclectic paradigm (Dunning, 2002; 2000; 1979)

ØThe KC model by Markusen et al. (1996) and Markusen (1997, 2002) talksabout the movements of FDI.

ØThe KC model establishes that both horizontal and vertical motivationsemerge simultaneously to determine the direction of FDI.

ØThe role of taxation in all these continue to be a subject of controversyamong economists.

ØThe role of tax in driving FDI in Africa, no doubt, remains an empiricalquestion.

ØGovernments often offer friendly tax regimes to attract and maintain FDI inorder to reap benefits of FDI.


BACKGROUNDØThese same economies largely rely on tax to generate theneeded revenue to finance development.ØThe tax regime may be too demanding, therebydiscouraging FDIs.ØIt is not clear how specific obligations of African taxsystems affect FDIs.ØThis study therefore seeks to examine the extent to whichtax obligations affects the ability of SSA countries to keepand maintain their stock of FDI.


BACKGROUNDØThe study also attempts to identify the extent to which theeffects of tax obligations are moderated by key determinants ofFDI in SSA.

ØStudies examining the relationship between of tax and FDIabound.

ØHowever, aside being bias towards developed countries, theyprimarily focus on establishing the relationship between FDIand one category of tax or the other.

ØE.g. Hunady & Orviska (2014); Wolff (2007), Mutti and Grubert2004; Blonigen andWang, 2005; and Azemar and Delios, 2008


StylisedFactsaboutFDIandTaxesinSSA


0

20

40

60

80

100

120

140

AngolaBenin

Botswana

BurkinaFaso

Burundi

CameroonChad

Congo,Dem.Rep.

Congo,Rep.

Coted'Ivoire

EquatorialGuinea

EthiopiaGabon

Gambia,The

Ghana

Guinea-BissauKenya

Lesotho

Madagascar

MalawiMali

Mauritania

Mozambique

NamibiaNiger

Nigeria

Rwanda

Senegal

SierraLeone

SouthAfricaSudan

Swaziland

TanzaniaTogo

Uganda

ZambiaSSA

FDIStock PT NTP

0

100

200

300

400

500

600

700

800

900

AngolaBenin

Botswana

BurkinaFaso

Burundi

CameroonChad

Congo,Dem.Rep.

Congo,Rep.

Coted'Ivoire

EquatorialGuinea

EthiopiaGabon

Gambia,The

Ghana

Guinea-BissauKenya

Lesotho

Madagascar

MalawiMali

Mauritania

Mozambique

NamibiaNiger

Nigeria

Rwanda

Senegal

SierraLeone

SouthAfricaSudan

Swaziland

TanzaniaTogo

Uganda

ZambiaSSA

TPT

MethodologyandDataØThe study used a panel of 36 countries from SSA.

!"# = %" + '()*

(+,,"#.,,"# + /"# *

ØWhere ! is the stock of FDI, i=1,…36, t=2005,…,2016. X is a vector ofexplanatory variables and + is a vector of coefficients to be estimated.ØVariables captured by X includes LW, NTP, PT, LTP, NR, LY, LEX, LP

ØThe study also interacted the three tax variables with NR, LY and LEXØData was mainly sourced from UNCTAD, ILO, WDI, andWDBI

ØThe estimation technique used was based on the system GMM



ResultsandDiscussionsFDIStock%GDP ProfitTax NumberofTaxes TimetoPrepareandPay

TaxMean N Mean N Mean N Mean N

Angola 48 12 25 12 32 12 289 12Benin 12 12 13 12 55 12 270 12Botswana 28 12 19 12 34 12 147 12BurkinaFaso 8 12 17 12 45 12 270 12Burundi 3 12 25 12 29 12 209 12Cameroon 18 12 30 12 44 12 657 12Chad 39 12 31 12 54 12 735 12Congo,Dem.Rep. 39 12 49 12 43 12 327 12

Congo,Rep. 118 12 2 12 57 12 605 12Coted'Ivoire 27 12 9 12 65 12 272 12EquatorialGuinea 58 12 23 12 46 12 492 12

Ethiopia 17 12 27 12 30 12 245 12Gabon 24 12 19 12 26 12 488 12Gambia,The 41 12 6 12 48 12 368 12Ghana 36 12 19 12 33 12 244 12Guinea-Bissau 7 12 16 12 46 12 218 12

Kenya 12 12 32 12 39 12 353 12Lesotho 32 12 12 12 25 12 366 12Madagascar 43 12 19 12 24 12 226 12Malawi 18 12 24 12 28 12 229 12Mali 18 12 12 12 50 12 270 12Mauritania 80 12 25 12 40 12 669 12Mozambique 92 12 31 12 37 12 226 12Namibia 7 12 18 12 33 12 327 12Niger 39 12 18 12 41 12 270 12Nigeria 16 12 28 12 52 12 815 12Rwanda 10 12 26 12 24 12 144 12Senegal 14 12 16 12 59 12 645 12SierraLeone 34 12 9 12 31 12 354 12SouthAfrica 41 12 23 12 9 12 235 12Sudan 25 12 14 12 42 12 180 12Swaziland 20 12 28 12 33 12 118 12Tanzania 31 12 20 12 48 12 177 12Togo 26 12 10 12 49 12 266 12Uganda 29 12 22 12 31 12 209 12Zambia 50 12 2 12 36 12 183 12

-0.0122 -0

.0128

-0.443

NTP PT LTP

-0.01-0.01

-0.51

0.37

0.5

0.455

NTP PT LTP LEX LY NR

-0.012 -0.01 -0.287

3.137

0.101

1.187

0.01

-0.064

-0.135

NTP PT LTP NR_NTP NR_PT NR_LTP PTNR NTPNR LPTNR

0.038

-0.071

-1.647

0.728

0.29

-0.9430.009

-0.011

0.243

NTPPT

LTPEX_NTP

EX_PTEX_LTP

PTEXNTPEX

LPTEX

-1.8

-1.6

-1.4

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.243-0.021

3.516

0.864

0.512

1.404 0.001-0.011-0.164

NTPPT

LTPLY_NTP

LY_PTLY_LTP

PTLYNTPLY

LPTLY

0

1

2

3

4

5

6

7

ConclusionsandPolicyImplications

ØTax Obligations general have adverse effect on stock ofFDI.ØNatural resource rich economies are likely to shieldthemselves from the adverse effect of profit tax.ØExpansion in output also reduces the adverse effect of profittax.ØNumber of Taxes and the time it takes to honour taxobligations are usually inimical to maintaining the stock ofFDI


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TAX OBLIGATIONS AND FOREIGN DIRECT INVESTMENT: NEW … · 2018-11-27 · tax obligations and foreign direct investment: new evidence from sub-saharan africa francis k. andoh(phd)