BEYOND TAX INCENTIVES: REASSESSING THE DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN DEVELOPING ECONOMIES

Abstract

The relationship between corporate income tax rates and foreign direct investment inflows is examined in this study. This issue is particularly relevant for developing and transition economies, where governments frequently rely on tax policy to attract foreign investment despite concerns regarding the fiscal costs of tax incentives and uncertain economic returns. In this context, the study evaluates whether corporate taxation significantly influences inward foreign direct investment once broader host-country characteristics are considered. The analysis is conducted using a balanced sample of 50 countries covering the period from 2008 to 2025. Foreign direct investment inward flow is employed as the dependent variable, while the statutory corporate tax rate serves as the principal explanatory variable. The findings do not provide strong empirical support for the argument that lower statutory corporate tax rates systematically attract higher inward foreign direct investment. Although the pooled ordinary least squares model reports a negative coefficient for the tax-rate variable, the relationship remains statistically insignificant and unstable across the estimated panel models. Corporate tax rates fail to emerge as statistically meaningful determinants of inward foreign direct investment under both random effects and fixed effects estimations. Gross domestic product appears as the most important determinant of inward foreign direct investment, while trade openness and inflation remain statistically insignificant. The findings moderate the predictions of tax competition theory by indicating that tax policy alone is unlikely to attract substantial foreign direct investment without broader structural and institutional advantages.

Keywords: Corporate Income Tax, Foreign Direct Investment, Tax Competition, Economic Openness