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The Quest for Non-Resource-Based FDI: Do Taxes Matter?

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  • Tidiane Kinda

Abstract

Using manufacturing and services firm-level data for 30 sub-Saharan African (SSA) countries, this paper shows that taxation is not a significant driver for the location of foreign firms in SSA, while other investment climate factors, such as infrastructure, human capital, and insitutions, are. By analyzing disaggregate FDI data, the paper establishes that, while there is considerable contrast in behavior between vertical FDI (foreign firms producing for export) and horizontal FDI (foreign firms producing for local markets), taxation is not a key determinant for either type of FDI. Horizontal FDI is attracted to areas with higher trade regulations, highlighting interest in protected markets. Furthermore, horizontal FDI is affected more by financing and human capital constraints, and less by infrastructure and institutional constraints, than is vertical FDI.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 14/15.

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Length: 24
Date of creation: 27 Jan 2014
Date of revision:
Handle: RePEc:imf:imfwpa:14/15

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Keywords: Taxes; Sub-Saharan Africa; Foreign direct investment; Human capital; Infrastructure; Developing countries; foreign ownership; tax incentives; foreign capital; foreign investors; host country; mnes; external financing; foreign investments; host countries; foreign companies; investment climates; medium-sized firms; medium-sized enterprises; foreign participation; investment decisions; fixed investment; international investment; credit markets; market access; market size; multinational enterprises;

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References

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  1. Beata K. Smarzynska & Shang-Jin Wei, 2000. "Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence," NBER Working Papers 7969, National Bureau of Economic Research, Inc.
  2. Stephen Ross Yeaple, 2003. "The Role of Skill Endowments in the Structure of U.S. Outward Foreign Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 726-734, August.
  3. Ruud A. de Mooij & Sjef Ederveen, 2008. "Corporate Tax Elasticities A Reader’s Guide to Empirical Findings," Working Papers, Oxford University Centre for Business Taxation 0822, Oxford University Centre for Business Taxation.
  4. Dollar, David & Hallward-Driemeier, Mary & Mengistae, Taye, 2004. "Investment climate and international integration," Policy Research Working Paper Series 3323, The World Bank.
  5. Smarzynska, Beata K. & Shang-Jin Wei, 2000. "Corruption and the composition of foreign direct investment - firm-level evidence," Policy Research Working Paper Series 2360, The World Bank.
  6. Kinda, Tidiane, 2010. "Investment Climate and FDI in Developing Countries: Firm-Level Evidence," World Development, Elsevier, Elsevier, vol. 38(4), pages 498-513, April.
  7. Tidiane Kinda & Patrick Plane & Marie‐Ange Véganzonès‐Varoudakis, 2011. "Firm Productivity And Investment Climate In Developing Countries: How Does Middle East And North Africa Manufacturing Perform?," The Developing Economies, Institute of Developing Economies, Institute of Developing Economies, vol. 49(4), pages 429-462, December.
  8. Mario Mansour & Michael Keen, 2009. "Revenue Mobilization in Sub-Saharan Africa," IMF Working Papers 09/157, International Monetary Fund.
  9. Mohamed Chaffai & Tidiane Kinda & Patrick Plane, 2012. "Textile Manufacturing in Eight Developing Countries: Does Business Environment Matter for Firm Technical Efficiency?," Journal of Development Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 48(10), pages 1470-1488, October.
  10. Urata, Shujiro & Kawai, Hiroki, 2000. " The Determinants of the Location of Foreign Direct Investment by Japanese Small and Medium-Sized Enterprises," Small Business Economics, Springer, Springer, vol. 15(2), pages 79-103, September.
  11. Liu, Zhiqiang, 2008. "Foreign direct investment and technology spillovers: Theory and evidence," Journal of Development Economics, Elsevier, Elsevier, vol. 85(1-2), pages 176-193, February.
  12. S. Van Parys & S. James, 2010. "The Effectiveness of Tax Incentives in Attracting FDI: Evidence from the Tourism Sector in the Caribbean," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 10/675, Ghent University, Faculty of Economics and Business Administration.
  13. Du, Julan & Lu, Yi & Tao, Zhigang, 2008. "Economic institutions and FDI location choice: Evidence from US multinationals in China," Journal of Comparative Economics, Elsevier, vol. 36(3), pages 412-429, September.
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