Influence of Foreign Direct Investment on Tax Revenue in Selected Asian Countries

This study examined the influence of foreign direct investment on tax revenue in five selected Asian countries. Three panel data (1988-2020) analysis approaches were employed in this study, namely the fully modified ordinary least squares (FMOLS), fixed effects (FE) and the pooled ordinary least squares (POLS). Whether economic growth and trade openness are channels through which tax revenue generation is enhanced by foreign direct investment is another objective of this study. The existing literature on the relationship between foreign direct investment, tax revenue and absorption capacities in the host country produced results which are inconclusive, mixed, divergent and far from authoritatively showing consensus. Pooled OLS (all three models) showed that tax revenue generation was enhanced significantly by foreign direct investment whilst FMOLS and fixed effects indicate a non-significant positive relationship running from foreign direct investment towards tax revenue. The complementarity between foreign direct investment and economic growth was found to have a significant enhancing effect on tax revenue under the pooled OLS. On the other hand, a non-significant positive relationship between the complementarity variable (foreign direct investment x economic growth) and tax revenue running from the former to the latter. Across all the three econometric estimation methodologies, the combination between foreign direct investment and trade openness was observed to have had an insignificant enhancing influence on tax revenue generation. The study urges the selected Asian nations to design and implement economic growth strengthening policies to enhance the positive impact of foreign direct investment on tax revenue. Investigating foreign direct investment threshold levels that enhances significant tax revenue generation should be part of further research related to this study.