The effect of foreign direct investment on tax revenue in developing countries

Internal resource mobilisation remains a big challenge for developing countries. While many studies have attempted to highlight several strategies to increase tax revenues, the contribution of FDI flows in this process has received little attention. When discussing the link between FDI and tax revenues, two opposing mechanisms may be at play: (1) FDI inflows could boost tax revenues by broadening the corporate income tax base with a new entry (new investment); (2) to attract FDI, many developing countries grant large tax exemptions to new investors who can sometimes lead to unfair competition, FDI inflows may not result in a significant increase in tax revenues. This paper tries to provide an empirical answer to FDI inflows' crucial role in tax revenue mobilisation. Using a System GMM system estimator for 90 developing countries over the period 1990-2017, our results strongly suggest that FDI inflows lead, to a significant tax revenue increase. Nevertheless, this effect is not observed in resource-exporting countries where tax revenues seem statistically insensitive to FDI inflows.