Tax Incentives, International Competitiveness, Investment Climate And Foreign Direct Investment In East Africa Community Partner States

Abstract

Foreign Direct Investment (FDI) has become an essential and effective economic catalyst for stimulating economic development especially by countries with low domestic savings. Therefore, countries around the world employ different strategies aimed at attracting more FDI, key among them being provision of tax incentives. Nevertheless, the link between tax incentives and FDI is one of unresolved issues in public finance with empirical studies registering conflicting results. This study therefore, sought to determine the relationship among tax incentives, international competitiveness, investment climates and FDI inflows in East Africa Community partner states. The study was anchored on the theoretical explanations of the neoclassical investment theory and positivistic philosophy. A panel data of the five states in the EAC: Tanzania, Rwanda, Kenya, Burundi, and Uganda was used, with the unit of analysis being the individual partner state. The study employed secondary data, for 16-year period, from 2002 to 2017. The data was analyzed using inferential and descriptive statistics aided by STATA version 14 statistical software. Descriptive statistics were employed to summarize the data using mean, standard deviation, maximum and minimum values among other measures of central tendency. Inferential statistics entailed panel linear regression and correlation analysis. Tax holidays and period of losses carried forward did not have statistically significant influence on FDI inflow. Investment allowances had a positive statistically significance influence on and FDI inflow. Export prices, consumer prices and export growth as indicators of international competitiveness did not have any mediating effect on the relationship between tax incentives and FDI in the five EAC partner states. In addition, the study established that corruption as an indicator of investment climate had an influence on the relationship between tax incentives and FDI in the five EAC partner states. However, Political stability, trade openness and electricity supply did not have influence on the relationship between tax incentives and FDI among the five EAC partner states. Jointly, tax incentives, international competitiveness and investment climate had statistically significant influence on FDI inflow and accounted for 13.48% variations of FDI inflow. Trade openness had a positive statistically significance influence on FDI. The study recommends that; provision of more investment allowance, eradication of corruption and enhancement of trade openness in EAC partner states. Additionally, EAC partner state should cease offering tax holidays and period of losses carried forward. The study contribute to knowledge by providing evidence that investment allowances and trade openness have statistically significance influence on FDI. In addition, the study shows that FDI relationship with tax holidays and period of losses carried forward is influenced by the level of corruption. Further studies could be conducted to establish the effect of tax incentives in attracting sectorial-based FDI. A comparative study of different economic blocs such as SADC, COMESA and EAC on effectiveness of tax incentives in attracting FDI can be conducted in future