The relationship between the corporate tax rate and foreign direct investment in the Southern African Customs Union

Abstract

Foreign direct investment (FDI) is crucial for developing countries in order to boost economic growth. Therefore, maintaining a favourable investment climate should be a priority goal for governments in these economies, and the Southern African Customs Union (SACU) is no exception. This can be achieved through implementing policies that are aimed at attracting FDI into the SACU economies. This study investigates the relationship between the corporate income tax (CIT) rate and FDI in the SACU region. The study used a panel dataset of the five SACU member states, covering the period 2000 to 2019. In an effort to separate South Africa’s dominance over the other smaller SACU countries, the study estimated two panels, the first panel being for SACU as a whole, and the second panel for the smaller member states only. The study used the pooled Ordinary Least Squares (OLS) regression and Fixed-Effects (FE) models, and further estimated the Seemingly Unrelated Regression (SUR) model on the data. The main independent variable is the CIT rate and the dependent variable is the FDI inflows. Other control variables were introduced into the model: the GDP annual growth rate, inflation rate, population growth rate, openness, political stability and control of corruption. The findings from the empirical analysis indicate that the CIT rate is insignificant in attracting FDI into the region as a whole. Control of corruption, political stability, population growth, inflation and openness were established to have a statistically significant association with the FDI inflows. GDP growth, on the other hand, is insignificant. For the smaller economies, mixed results were obtained from the different models regarding the effect of the CIT rate on FDI. It was established though, that the CIT rate has a more significant effect in the smaller economies than in the union as a whole. Otherwise, all other independent variables indicated similar conclusions to those for the first panel.