Foreign direct investment and tax revenue mobilization in South Africa: an ARDL bound testing approach

Abstract

ABSTRACT In addition to performing their basic fiscal functions, governments in developing economies are constantly challenged by new and re-emerging socioeconomic issues such as insecurity, hunger, natural disaster, collapsing infrastructure and disease outbreaks which have made the competition for limited resources fierce and hence the need to mobilize funds. Revenue mobilization forms a critical crux of development plans in any economy and the public finance literature is replete with an investigation of factors that motivate revenue mobilization. In spite of the documented indisputable roles of foreign direct investment (FDI) in the economic performance of developing economies and the resultant aggression in mobilizing FDI, its implications for tax revenue have not been well investigated. This study, therefore, assessed the role of FDI in mobilizing tax revenue in South Africa. Accounting for the potential structural break, the study used time series data from 1994 to 2021 within the Autoregressive Distributed Lag–Error Correction Model (ARDL-ECM). The results showed that FDI has a statistically significant negative effect on tax revenue. Following the outcomes of this study, it is recommended that in addition to sound public finance policies, the government should prioritize efficient investment policies in its FDI mobilization drive.