Impact of foreign direct investment inflows on tax revenues in OECD countries: A panel cointegration and causality analysis

Abstract

Globalization process has led considerable increases in the global foreign direct investment flows especially as of mid-1980s. Foreign direct investment inflows have potential to affect economic growth, capital accumulation, human capital, competitiveness, development of finance sector and technological progress in the host country and in turn affects the tax revenues. In this study, we analyzed the relationship among foreign direct investment inflows, economic growth and total tax revenues in 33 OECD countries during 1995-2014 period using Westerlund- Durbin-Hausmann (2008) panel cointegration test and Dumitrescu and Hurlin (2012) panel causality test. We revealed a cointegrating relationship among foreign direct investment inflows, economic growth and total tax revenues Furthermore, there was one-way causality from foreign direct investment inflows to total revenues and bidirectional causality between economic growth and foreign direct investment inflows.

Keywords

• foreign direct investment inflows
• tax revenue
• panel data analysis