The Effect of Tax Attractiveness on Direct Foreign Investment Inflows: Panel Data Analysis for Developed and Developing Countries


In the study, the effect of tax attractiveness, which includes many incentive items, on Foreign Direct Investment (FDI) inflows, was analyzed by panel data analysis for developed and developing country groups using 2007-2018 period data. Since the tax attractiveness index has been published annually since 2007, this year has been preferred as the starting year. In addition, trade openness, economic freedom index and increase in per capita national income data, which may have an impact on FDI inflows, are also included in the model. Since the model established for developed and developing countries has a horizontal cross-section dependency, the existence of the unit root in the variables was made with Pesaran (2007). Afterwards, it was decided to apply the fixed effect model in developed countries and the random effect model in developing countries with Hausman test. Since the variance, autocorrelation and horizontal cross-section dependency were found in the models, the analysis was estimated by Driscoll Kraay test. As a result of the study, the effect of tax attractiveness on FDI inflows in both country groups was found to be positive and statistically significant. Policy makers can use this information for future tax reforms that can be targeted to increase the attractiveness of the location. While the effect of increase in per capita income per capita on the FDI inflows in developed countries was positive but statistically insignificant, the effect of other variables was found positive and significant for both country groups.


Keywords


Tax Attractiveness, FDI, Developed Countries, Developing Countries, Panel Data Analysis

Author : Hüseyin KUTBAY
Number of pages: 855-873
DOI: http://dx.doi.org/10.29228/TurkishStudies.42025
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Turkish Studies-Economics,Finance,Politics
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