Abstract:
Developing countries are often constrained by insufficient domestic capital and urgently need to absorb foreign capital to achieve sustained economic growth and social development. However, the foreign direct investment flowing into developing countries in recent years has not reached people's expectations. This study aims at analyzing the impact of host country's tax environment attractiveness on foreign direct investment in developing countries and also investigating whether country’s institutional quality plays any moderating role in the relationship between tax environment attractiveness and foreign direct investment. Unbalanced panel data of 55 developing countries from the period 2007 to 2017 are used in the linear dynamic panel models designed for the study using two-step system Generalized Method of Moment (GMM) technique. The main findings are in two folds. First, the impact of host country's tax environment attractiveness is positive and statistically significant on foreign direct investment. Secondly, the study provides evidence to suggest that institutional quality significantly moderates the relationship between tax environment attractiveness and foreign direct investment. Unlike previous studies which investigated the effect of taxation on FDI inflows using a single tax factor, this study applies tax attractiveness index which incorporates 16 tax factors to estimate the impact of tax environment on foreign direct investment. Furthermore, the study indicates that institutional quality plays significant role in the relationship between tax environment attractiveness and foreign direct investment.