Short-term and long-term effects of foreign direct investment on tax revenue: empirical evidence from an emerging economy

Abstract

Purpose – This paper examines the short- and long-run effects of foreign direct investment (FDI) on tax revenue in Ghana. Design/methodology/approach – The paper adopts the autoregressive distributed lag approach to estimate FDI’s long-run and short-run effects on tax revenue. The study uses time-series data from 1983 to 2019 for Ghana, mainly obtained from The Bank of Ghana, the World Bank and the IMF. Findings – The results show that, in the short-run, FDI has no significant effect on direct tax revenue and total tax revenue but significantly hurts indirect tax revenue. In the long run, however, the results show that FDI has significant positive effects on indirect tax revenue and total tax revenue but no significant effect on direct tax revenue. Originality/value – Empirical studies often fail to analyse the short-run and long-run effects of FDI on tax revenue. This study contributes to the mixed literature by analysing the short-run and long-run effects of FDI on tax revenue in an emerging market context. Additionally, this study employs three tax revenue measures in analysing the nexus.

Keywords

• Tax revenue
• Foreign direct investment
• Ghana
• Multinational corporations
• ARDL