Trade openness and corporate tax rates determine FDI in Pakistan: a Cointegration-ECM analysis

Abstract

A number of tries helped estimate a regression model, specifying short run and long run relationship between foreign direct investments (FDIs) and its two major determinants, namely trade openness and corporate tax rates in Pakistan. The estimated model, and both its Cointegration and ECM components, brings on surface certain important implications,for all major stakeholders. The public sector policy makers need to take note of the fact that foreign direct investment has been found being significantly affected positively by trade openness and negatively by corporate tax rates. So, efforts to enhance trade openness need to be encouraged. Similarly, the Federal Board of Revenue officials responsible for taxation policies in the country, should be aware of the fact that rates of corporate tax negatively and significantly affect FDIs in Pakistan; hence they should take this fact in to account while framing taxation policies and determining rates of taxes. The researchers interested in the topic for future research are urged to carry out research on optimizing relationship of tax rates and FDIs,for determining and guantifying the exact levels of relationship between the two variables.