Modelling the synergy between fiscal incentives and foreign direct investment in Ghana

Abstract

PurposeThe purpose of the paper was to investigate the role of fiscal incentives in driving foreign direct investment (FDI) inflows into the Ghanaian economy based on data from 1975 to 2017 with the Eclectic paradigm as the theoretical basis. FDI inflows was the dependent variable whiles trade openness, corporate tax rate, exchange rate and market size were the independent variables with corporate tax rate as the main explanatory variable of interest.Design/methodology/approachThe autoregressive distributed lag (ARDL) bounds test technique was employed to investigate Cointegration in the model. The results showed the presence of cointegration among the variables.FindingsThe results revealed that corporate tax rates have a significant negative impact on FDI inflows into the Ghanaian economy in the long run and significant positive impact on FDI inflows in the short run. In the context of Ghana, the positive short-run relationship observed is attributed to the lag effect of tax policy on FDI inflows.Research limitations/implicationsOne obvious limitation of the research is that, it does not identify the specific foreign businesses that are more deserving of a low corporate rate and to what extent can that boost FDI inflows in Ghana. Another limitation is that the data analyzed in the paper is exclusively for Ghana and the findings may not be generalized for other countries.Practical implicationsBased on the research findings, it is recommended that the Ghana Revenue Service (GRA) restructures the corporate tax regime in the country to deal with the policy lapses. It is also recommended that low corporate rates should be maintained especially in respect of foreign companies that are into the production of goods and services for which indigenous companies in Ghana have a comparative disadvantage in order to drive FDI into the Ghanaian economy.Originality/valueThis paper is unique for providing up to date and dynamic insights into the tax incentive and FDI nexus in the Ghanaian context.

Impact of Tax Incentives on Foreign Direct Investment: Evidence from Africa

“…Thus, an increase in corporate tax rate leads to a decrease in the inflows of foreign direct investment into African countries. Our result was consistent with earlier findings of [26,28,29,31], and therefore support the answer to our first research inquiry: the corporate tax rate in African countries influences the inflows of foreign direct investment.…”

“…Abille et al [26] attempt to explore the function of fiscal incentives in attracting foreign direct investment inflows into Ghana by using data from 1975 to 2017. This was done by applying the distributed lag (ARDL) bounds test technique, which showed that corporate tax rates have a significant negative impact on FDI inflows into the Ghanaian economy in the long run.…”

Impact of Tax Incentives on Foreign Direct Investment Flow in Nigeria

“…Therefore, a robustness test was performed to investigate the surface of this study's regression result and findings. To this end, the sample was divided based on three groups of sectors used in this study; (1) the Manufacturing sector, (2) the Agricultural sector, and the Construction sector. Table 3 shows the result of Driscoll-Kraay Standard Errors regression under the three groups.…”

“…However, a literature review on the link between tax incentives and FDI flow reveals mixed results. Whereas some studies established a positive relationship between tax incentives and FDI flow [18], others reported adverse effects [1,9]. Similarly, even though some studies explored the link between tax incentives and FDI flow in the Nigerian context, most studies were silent on custom duty exemption and tax holidays as a form of tax incentives.…”

Tax Holiday and Foreign Direct Investment In Indonesia

“…The steps taken include economic liberalization, guaranteeing profit repatriation, infrastructure provision, low labor wages, and tax incentives. Among these efforts, the provision of tax incentives is the most common because it can provide facilities directly to investors and place them in strategic positions, hoping that investors can improve their performance and continue to invest in the country (Abille et al 2020). World Bank data on FDI inflows to Indonesia illustrate that FDI reached the highest amount in 2005 over the past two decades, at 2.9 percent of GDP.…”