Trade Globalization, Overseas Investment, and Tax Revenue Growth in Sub-Saharan Africa

Abstract

The financial setbacks of the sub-Saharan African regions have necessitated this study. The study assesses the role of trade openness and foreign direct investment (FDI) in driving tax revenue growth in sub-Saharan Africa. The major parameter representing the dependent variable is tax revenue growth while the independent factors include trade openness, exports, imports, and GDP as a moderating element. The research runs from 1990 to 2022 and employs the vector error correction model (VECM), with a unit root test that yields order one, while the Johansen co-integration test shows a long-run connection for all variables. The VECM results suggest that the long-run disequilibrium is corrected at a positive rate of 8.5%. It is also noteworthy that a percentage change in trade openness would result in a 13.7% decrease in tax income, but fluctuations in all other parameters except GDP will enhance tax revenue growth in sub-Saharan Africa. The test for the impact of all criteria on tax revenue growth yields minor results; however, tax revenue growth initiatives in Sub-Saharan Africa have a negative short- term effect on FDI but a favourable long-term impact. In addition, trade openness has a negative effect on GDP and exports in the short run, while imports have a negative impact on foreign investment. The policy implications include that bilateral trade policies will need to be reviewed, with an emphasis on exports, economic growth, and tax collection schemes. In addition, the governments in sub-Saharan African regions are encouraged to enact tax policies that would engender the inflow of overseas investment.