Did reduction in corporate tax rate attract FDI in Pakistan?

Abstract

AbstractForeign direct investment (FDI) is a very important factor for economic growth because of its associated benefits such as advanced technology, employment, and economic development for the developing host countries. The factors of lower corporate tax rate, social peace, consistent energy supply, better infrastructure, skilled labor, political stability and business openness are very important for foreign investors. Therefore, this study investigates the impact of corporate tax reduction, terrorism, energy shortfall, availability of labor, infrastructure and degree of business openness on the FDI in Pakistan. Further, it compares democratic and autocratic regimes to evaluate their impact on attracting FDI in Pakistan. A vector error correction (VEC) model is used on the secondary data of the period 1989–2016. The results of the study show that corporate tax rate, terrorism, and energy shortfall have significant negative impact on FDI. The study results also confirm that autocratic period was more favorable to attract FDI providing openness to the economy when compared to democratic period. The findings of this study could be used by policy makers for future FDI policy of Pakistan.