The Dynamic Relationship between Tax Revenue and Foreign Direct Investment in Nigeria

Abstract

The relative success or failure of the investment policies introduced by various government have being a subject of controversy and the importance accorded tax incentive as a policy strategy influencing FDI called for studying the relationship between them going by the conflicting research findings of negative and positive uni-directional relationships between the concepts from some writers. Therefore, this study examined the nexus between tax revenue and foreign direct investment (FDI) in Nigeria between1976-2012. The data for the study were gathered from Central Bank of Nigeria (CBN) Statistical Bulletin (Various Issues) & National Bureau of Statistics, International Monetary Fund (IMF), Balance of Payments database. The underpinning theory for this study was neo-classical traditional theory of the users cost of capital approach. The ARDL methodology approach to cointegration analysis and vector Error Correction model were adopted to examine the equilibrium relationship and direction of causality respectively. The Pesaran et al (2001) test of cointegration analysis used in the study established a cointegration running from company income tax and foreign direct investment as Fstatistic of the unrestricted value of 7.055295 exceeds the upper bound at both 1% and 5% significant levels. The result of long-run ARDL also confirmed that there is evidence of a co-integration relationship running between CIT and FDI. The magnitude of R reflects that the variation in company income tax can be explained by both short-run and long-run impact of foreign direct investment. The findings from study as well showed that there is long run uni-directional causality running between FDI and CIT. In line with the findings of this study, it was recommended that Government should intensify more efforts at introducing foreign investment friendly incentive policies. These policy measures such as promotion of domestic based production, non-oil exports, rationalization and restructuring of tariff, liberalization of the external trade, reduction in value-added tax, property tax, rent, royalties, import duties, sales tax and depreciation tax are to increase the inflow of foreign direct investment as well as boosting the value of company income tax in the future. Also, floating or flexible exchange rate, interest rate and unemployment rate should be reduced so as to increase the inflow of FDI in the economy.