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Working Paper 310 - Tax Policy, Foreign Direct Investment and Spillover Effects

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Abstract

Foreign direct investment (FDI) inflows are crucial for economic development. To attract them, countries have typically used tax incentives, specifically reductions in corporate income tax (CIT) rates. This paper empirically assesses the impact of such CIT rate changes on FDI net inflows in Africa. Using a dynamic spatial Durbin model with fixed effects, our results show that cuts in CIT rates increase FDI net inflows in the host country and in the neighboring countries in the short and long run. These results are robust to the use of alternative spatial weighting matrices as well as the inclusion of additional controls in the baseline specification. Furthermore, we find a strategic complementarity in FDI inflows between the countries in our sample, suggesting that an increase in FDI inflows in a host country is likely to stimulate FDI inflows of its neighbors. JEL Code: C23, E62, F21, H25.

Suggested Citation

  • Boly Amadou & Seydou Coulibaly & Eric Kéré Nazindigouba, 2019. "Working Paper 310 - Tax Policy, Foreign Direct Investment and Spillover Effects," Working Paper Series 2436, African Development Bank.
    • Handle: RePEc:adb:adbwps:2436
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    Cited by:

    1. Laudage, Sabine, 2020. "Corporate tax revenue and foreign direct investment: Potential trade-offs and how to address them," IDOS Discussion Papers 17/2020, German Institute of Development and Sustainability (IDOS).
    2. Bouzid,Bechir Naier & Toumi,Sofiene, 2020. "The Determinants of Regional Foreign Direct Investment and Its Spatial Dependence : Evidence from Tunisia," Policy Research Working Paper Series 9484, The World Bank.

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    More about this item

    Keywords

    FDI; statutory corporate tax rate; panel data; spatial econometrics.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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