Effects of Tax Burden on Foreign Direct Investment Inflows into the East African Community Countries: Empirical Evidence
Abstract
This research was an empirical study on the effects of tax burden on foreign direct investment inflows into the East African Community member countries. The purpose of the study was to determine empirically the effect of tax burden on foreign direct investment inflows into the East African Community countries. This study is anchored on tax competition theory which supports the proposition that in host countries, when tax burden decreases, FDI inflows increase. Therefore, host governments lower tax burden to attract increased and consistent investment inflows into the country. Hence, this strategy creates competitive advantage based on tax. Equally, this competitive advantage is expected to result in benefits such as human capital and financial development that positively impact on the economic development in the country. Therefore, use of tax burden to attract FDI inflows is an act of tax competition. World over, several empirical studies have been conducted to establish the relationship between tax burden and FDI inflows. Some studies have found that tax burden has positive effect on FDI inflows while other studies have found that tax burden has negative effect on FDI inflows. Still, other studies have found that tax burden has no effect on FDI inflows. Therefore, there is no consensus on the effects of tax burden on FDI inflows. This study seeks to answer the question: what is the effect of tax burden on FDI inflows into the EAC countries? The study used correlational research design on secondary data from 2000 to 2013 for Burundi, Tanzania, Uganda, Kenya and Rwanda. The dependent variable was FDI inflows while the independent variable was tax burden. Data analysis (Johansen tests of co-integration, summary statistics tests, variables' trends, covariance analysis, correlation analysis, Granger-causality and Vector Error Correction (VECM) Models) and hypothesis tests (ANOVA and regression analyses) were conducted. The study found that tax burden had insignificant negative coefficients during the study period. The study concluded that tax burden had insignificant negative effect on FDI inflows in the EAC countries. Therefore, tax competition theory does not hold in the East African Community countries. The study contributes to research by providing empirical evidence on the relationship between tax burden and FDI inflows in the EAC countries. In addition, the study contributes to practice since tax policy formulation in the EAC countries as evidenced by tax incentives such as tax concessions and tax holidays is influenced by the need to attract FDI inflows. However, the results indicate that there is need to refocus away from use of tax policy in efforts attract FDI inflows into the EAC countries. The study recommends a repeat of same study in presence of other independent factors such as economic development indicators and macroeconomic factors to determine the effect of tax burden on FDI inflows into the EAC countries.
Key Words: Tax Burden, FDI Inflows & East African Community Countries.
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