The impact of income tax on foreign direct investment attraction: International evidence


Authors

  • Tran Manh Ha Banking Academy of Vietnam
DOI: https://doi.org/10.57110/vnu-jeb.v5i1.466

Keywords:

Income tax, FDI, inverted U-shaped relationship

Abstract

This paper investigates the impact of income tax on attracting foreign direct investment (FDI) in countries with different income levels. Using data from the World Bank, the test results show that income tax has different impacts on FDI depending on the income groups of the countries. In low-income, lower-middle-income, and high-income countries, income tax has a positive impact on FDI. The inverted U-shaped nonlinear relationship between income tax and FDI is also confirmed in these three income groups, suggesting that there is an optimal tax level to maximize investment inflows. These results highlight the importance of appropriate tax policies to attract FDI, especially in the context of macroeconomic factors such as GDP size and unemployment rate also playing important roles. The findings are valuable for policy makers in designing appropriate tax strategies to optimize economic benefits and enhance the country’s investment attractiveness.

References

Alharthi, M., Islam, M. M., Alamoudi, H., & Murad, M. W. (2024). Determinants that attract and discourage foreign direct investment in GCC countries: Do macroeconomic and environmental factors matter? PLOS ONE, 19(2), e0298129. https://doi.org/10.1371/journal.pone.0298129

Appiah-Kubi, S. N. K., Malec, K., Phiri, J., Maitah, M., Gebeltová, Z., Smutka, L., Blazek, V., Maitah, K., & Sirohi, J. (2021). Impact of tax incentives on foreign direct investment: Evidence from Africa. Sustainability, 13(15), 8661. https://doi.org/10.3390/su13158661

Azémar, C., Desbordes, R., & Wooton, I. (2020). Is international tax competition only about taxes? A market-based perspective. Journal of Comparative Economics, 48(4), 891-912. https://doi.org/10.1016/j.jce.2020.05.002

Becker, J., Fuest, C., & Riedel, N. (2012). Corporate tax effects on the quality and quantity of FDI. European Economic Review, 56(8), 1495-1511. https://doi.org/10.1016/j.euroecorev.2012.07.001

Bellak, C., Leibrecht, M., & Liebensteiner, M. (2010). Attracting foreign direct investment: The public policy scope for South East European countries. Eastern Journal of European Studies, 1(2), 37-53.

Boly, A., Coulibaly, S., & Kéré, E. N. (2020). Tax policy, foreign direct investment and spillover effects in Africa 1. Journal of African Economies, 29(3), 306-331. https://doi.org/10.1093/jae/ejz032

Desai, M. A., Foley, C. F., & Hines, J. R. (2004). Foreign direct investment in a world of multiple taxes. Journal of Public Economics, 88(12), 2727-2744. https://doi.org/10.1016/j.jpubeco.2003.08.004

Drapkin, I. M. (2020). The influence of taxes on inflows and outflows of foreign direct investment. Journal of Tax Reform, 6(3), 244-255. https://doi.org/10.15826/jtr.2020.6.3.084

Katitas, A., & Pandya, S. (2024). Investment incentives attract foreign direct investment: Evidence from the great recession. Public Choice, 200(1-2), 323-345. https://doi.org/10.1007/s11127-024-01158-0

Luo, C., Luo, Q., & Zeng, S. (2022). Bilateral tax agreement and FDI inflows: Evidence from Hong Kong investment in the Mainland China. China Economic Review, 73, 101788. https://doi.org/10.1016/j.chieco.2022.101788

Wint, A. G., & Williams, D. A. (2002). Attracting FDI to developing countries: A changing role for government? International Journal of Public Sector Management, 15(5), 361-374. https://doi.org/10.1108/09513550210435719

Downloads

Download data is not yet available.

Downloads

Published

25-02-2025

Abstract View

26

PDF Downloaded

6

How to Cite

Tran Manh Ha. (2025). The impact of income tax on foreign direct investment attraction: International evidence. VNU JOURNAL OF ECONOMICS AND BUSINESS, 5(1), 18. https://doi.org/10.57110/vnu-jeb.v5i1.466

Issue

Vol. 5 No. 1

Section

Original Article

License

Copyright (c) 2025 Trần Mạnh Hà

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

by VNU Journal of Economics and Business