Tax Incentives and Foreign Direct Investment Flows in Nigeria

The study examined the effect of tax incentives on FDI flows with particular emphasis on the Pioneer Status Tax holiday scheme. This study is conducted by utilizing ordinary least square regression on time series data to observe the relationship between FDI inflow and a list of explanatory variables particularly tax incentives measured using the PSTH during period 2000Q1 – 2016Q4. Secondary data was sourced from the CBN statistical bulletins, National Bureau of Statistics and the Federal Inland Revenue service. To empirically analyse the long-run relationships, the unit root test was conducted for the variables to ascertain their stationarity status, next, the Engle and Granger procedure for cointegration testing was also applied to ensure the existence of a long run relationship between the variables. Finally, the regression analysis was conducted. The findings showed that PSTH has some effect on FDI flows into sectors. Though, its significance appeared not to be pervasive across majority of the sectors. The results suggest that firstly, it is likely that more economic fundamentals will matter more than simply incentive and the response of FDI flows to tax incentives and secondly, the effect of tax incentives will also be largely moderated by the nature of business or industry characteristics. Given the presence of heterogeneity associated with different sectors, the incentives are unlikely to be similar in their effects. The study concludes that there is the need to ensure thorough coordination of tax incentives.