Foreign Direct Investment in Sub-Saharan Africa: Is Tax Obligation Still an Issue?

Abstract

This study examines the extent to which three aspects of tax obligations affect foreign direct investment (FDI) stock in sub-Saharan Africa (SSA). Using a panel of 36 countries in SSA from 2005 to 2016 and employing the dynamic system generalized method of moments (GMM) regression approach, the findings show a significant negative impact of all measures of tax obligations. However, the effect of the number of taxes and the time it takes to honour tax obligations are found to have greater negative effect. The findings show that although foreign investors are attracted by natural resources, they still care about the complicated and bureaucratic tax system. This challenges the conventional notion that FDI will always be attracted to and be maintained in Africa as long as there are natural resources. The practical implication is that reducing the number of taxes as well as the time it takes to honour tax obligations should be among the key measures for SSA economies to maintain high stock of FDI. As a contribution, this study provides an important information for the debate on fiscal environment and FDI in Africa.