Corporate Taxes and Foreign Direct Investments: An Impact Analysis

Abstract

We investigate the effects of corporate taxes on the flow of foreign direct investments (FDI) in Nigeria between 1983 and 2017. The study adopts the ex-post facto research design; secondary data were sourced from the World Bank Development indicator, Central Bank of Nigeria database, and Federal Inland Revenue database. Research data was analyzed using the Error Correction Model (ECM). The coefficient of determination (R²) showed that about 77 percent of the systematic changes in FDI are attributed to the combined effect of all the explanatory variables captured in the study. We find that Company Income Tax, Value Added Tax, and Custom and Excise Duties have a significant but negative relationship with FDI. In contrast, Tertiary Education Tax has a positive association with FDI. Also, Exchange Rate had a negative but significant relationship with FDI; Inflation had an insignificant but positive association with FDI, while GDP growth rate and Trade Openness showed a positive and significant association with FDI. Our findings deviate from previous results, as we find new evidence that a higher Education tax rate influences FDI, and the emerging evidence on the effect of non-tax variables on FDI inflow.

Keywords: Corporate Taxes, Foreign Direct Investments, Error Correction Model, Nigeria, Non-tax Variables.

JEL Classification: E22, F21, H2, P33.

DOI: 10.7176/PPAR/10-9-07

Publication date:September 30^th 2020