Causality between taxes and foreign direct investment: Experimental research in developing countries
Main Article Content
Abstract
The paper analyzes the causal relationship between taxes and foreign direct investment (FDI) in 32 developing countries in the period from 2009 to 2019. Empirical analysis is based on panel data of countries to check the causality between the variables that make up the table. The results show that there exists a long-run co-integration relationship between tax and FDI. In addition, the probability of a causal relationship was analyzed between the variables using the causality test developed by Dumitrescu and Hurlin (2012). The analysis results show that there is a two-way causal relationship between taxes and foreign direct investment. On that basis, the study makes some suggestions for tax policy for FDI in these countries.
Article Details
Keywords
FDI, Tax, Causality, Developing country
References
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Atukeren, E. (2007). A Causal Analysis of the R&D Interactions between the EU and the US. Global Economy Journal, 7(4), 1-29. doi: 10.2202/1524-5861.1301
Azémar, C., & Dharmapala, D. (2019). Tax sparing agreements, territorial tax reforms, and foreign direct investment. Journal of public economics, 169, 89-108.
Bayar, Y., & Ozturk, O. F. (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 (614), Spring), 31-40.
Blackburne III, E. F., & Frank, M. W. (2007). Estimation of nonstationary heterogeneous panels. The Stata Journal, 7(2), 197-208.
Bolwijn, R., Casella, B., & Rigo, D. (2018). An FDI-driven approach to measuring the scale and economic impact of BEPS. Transnational Corporations, 25(2), 107-144.
Bond, E. W., & Samuelson, L. (1986). Tax holidays as signals. The American Economic Review, 76(4), 820-826.
Chakrabarti, A. (2001). The determinants of foreign direct investments: Sensitivity analyses of cross‐country regressions. kyklos, 54(1), 89-114.
Clausing, K. A. (2009). Multinational firm tax avoidance and tax policy. National Tax Journal, 62(4), 703-725.
Crivelli, E., de Mooij, R., & Keen, M. (2016). Base Erosion, Profit Shifting and Developing Countries. FinanzArchiv: Public Finance Analysis, 72(3), 268-301.
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Dickey, D. A. and Fuller W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root, Journal of the American Statistical Association, 74, 427-431.
Dumitrescu, E. I., & Hurlin, C. (2012). Testing for Granger non-causality in heterogeneous panels. Economic modelling, 29(4), 1450-1460.
Fischel, W. A. (1975). Fiscal and environmental considerations in the location of firms in suburban communities, in “Fiscal Zoning and Land Use Controls”(ES Mills and WE Oates, Eds.). Heath-Lexington, Lexington, Mass.
Frees, EW. (1995). Assessing Cross-sectional Correlations in Panel Data. Journal of Econometrics 69: 393-414.
Friedman, M. 1937. The Use of Ranks to Avoid the Assumption of Normality Implicit in the Analysis of Variance. Journal of the American Statistical Association 32: 675-701.
Fuest, C., Huber, B., & Mintz, J. (2005). Capital Mobility and Tax Competition. Foundations and Trends® in Microeconomics, 1(1), 1-62.
Granger, C. W. J. (1969). Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica, 37(3), 424-438.
Hartwig, J. (2009). A panel Granger-causality test of endogenous vs. exogenous growth.
Hoyos, R. E., & Sarafidis, V. (2006). Testing for cross-sectional dependence in panel-data models. The stata journal, 6(4), 482-496.
Jhingan, M. L. (2004). Money, Banking, International Trade and Public Finance. 7th edition. Vrinda Publication (P) Ltd, New Delhi.
Oates, W. E. (1972). Fiscal federalism. Books.
Organisation for Economic Co-operation and Development. (2015). OECD/G20 Base Erosion and Profit Shifting Project. OECD Publishing.
Pesaran, M. H. (2004). General Diagnostic Tests for Cross Section Dependence in Panels. Available at SSRN 572504.
Rendon-Garza, J. R. (2006). Global corporate tax competition for export-oriented foreign direct investment. Georgia State University.
Tiebout, C. M. (1956). A pure theory of local expenditures. Journal of political economy, 64(5), 416-424.
Urbain, J. P., & Westerlund, J. (2006). Spurious regression in nonstationary panels with cross-unit cointegration. METEOR, Maastricht research school of Economics of TEchnology and ORganizations.
Wang, Z. Q. a. N. J. S. (1995). The determinants of foreign direct investment in transforming economies: Empirical evidence from Hungary and China‖, Review of World Economics, 131(2), 359-382.
Wei, S. J. (2000). How taxing is corruption on international investors?. Review of economics and statistics, 82(1), 1-11.
Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics 69, 709-748
White, M. J. (1975). Firm location in a zoned metropolitan area. Fiscal zoning and land use controls, 175-202.
Wilson, J. D. (1999). Theories of tax competition. National tax journal, 52(2), 269-304.
Zucman, G. (2014). Taxing across borders: Tracking personal wealth and corporate profits. Journal of economic perspectives, 28(4), 121-48.
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.
Atukeren, E. (2007). A Causal Analysis of the R&D Interactions between the EU and the US. Global Economy Journal, 7(4), 1-29. doi: 10.2202/1524-5861.1301
Azémar, C., & Dharmapala, D. (2019). Tax sparing agreements, territorial tax reforms, and foreign direct investment. Journal of public economics, 169, 89-108.
Bayar, Y., & Ozturk, O. F. (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 (614), Spring), 31-40.
Blackburne III, E. F., & Frank, M. W. (2007). Estimation of nonstationary heterogeneous panels. The Stata Journal, 7(2), 197-208.
Bolwijn, R., Casella, B., & Rigo, D. (2018). An FDI-driven approach to measuring the scale and economic impact of BEPS. Transnational Corporations, 25(2), 107-144.
Bond, E. W., & Samuelson, L. (1986). Tax holidays as signals. The American Economic Review, 76(4), 820-826.
Chakrabarti, A. (2001). The determinants of foreign direct investments: Sensitivity analyses of cross‐country regressions. kyklos, 54(1), 89-114.
Clausing, K. A. (2009). Multinational firm tax avoidance and tax policy. National Tax Journal, 62(4), 703-725.
Crivelli, E., de Mooij, R., & Keen, M. (2016). Base Erosion, Profit Shifting and Developing Countries. FinanzArchiv: Public Finance Analysis, 72(3), 268-301.
Devereux, M. P., & Freeman, H. (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.
Dickey, D. A. and Fuller W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root, Journal of the American Statistical Association, 74, 427-431.
Dumitrescu, E. I., & Hurlin, C. (2012). Testing for Granger non-causality in heterogeneous panels. Economic modelling, 29(4), 1450-1460.
Fischel, W. A. (1975). Fiscal and environmental considerations in the location of firms in suburban communities, in “Fiscal Zoning and Land Use Controls”(ES Mills and WE Oates, Eds.). Heath-Lexington, Lexington, Mass.
Frees, EW. (1995). Assessing Cross-sectional Correlations in Panel Data. Journal of Econometrics 69: 393-414.
Friedman, M. 1937. The Use of Ranks to Avoid the Assumption of Normality Implicit in the Analysis of Variance. Journal of the American Statistical Association 32: 675-701.
Fuest, C., Huber, B., & Mintz, J. (2005). Capital Mobility and Tax Competition. Foundations and Trends® in Microeconomics, 1(1), 1-62.
Granger, C. W. J. (1969). Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica, 37(3), 424-438.
Hartwig, J. (2009). A panel Granger-causality test of endogenous vs. exogenous growth.
Hoyos, R. E., & Sarafidis, V. (2006). Testing for cross-sectional dependence in panel-data models. The stata journal, 6(4), 482-496.
Jhingan, M. L. (2004). Money, Banking, International Trade and Public Finance. 7th edition. Vrinda Publication (P) Ltd, New Delhi.
Oates, W. E. (1972). Fiscal federalism. Books.
Organisation for Economic Co-operation and Development. (2015). OECD/G20 Base Erosion and Profit Shifting Project. OECD Publishing.
Pesaran, M. H. (2004). General Diagnostic Tests for Cross Section Dependence in Panels. Available at SSRN 572504.
Rendon-Garza, J. R. (2006). Global corporate tax competition for export-oriented foreign direct investment. Georgia State University.
Tiebout, C. M. (1956). A pure theory of local expenditures. Journal of political economy, 64(5), 416-424.
Urbain, J. P., & Westerlund, J. (2006). Spurious regression in nonstationary panels with cross-unit cointegration. METEOR, Maastricht research school of Economics of TEchnology and ORganizations.
Wang, Z. Q. a. N. J. S. (1995). The determinants of foreign direct investment in transforming economies: Empirical evidence from Hungary and China‖, Review of World Economics, 131(2), 359-382.
Wei, S. J. (2000). How taxing is corruption on international investors?. Review of economics and statistics, 82(1), 1-11.
Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics 69, 709-748
White, M. J. (1975). Firm location in a zoned metropolitan area. Fiscal zoning and land use controls, 175-202.
Wilson, J. D. (1999). Theories of tax competition. National tax journal, 52(2), 269-304.
Zucman, G. (2014). Taxing across borders: Tracking personal wealth and corporate profits. Journal of economic perspectives, 28(4), 121-48.