Tax Policy, Foreign Direct Investment and Spillover Effects in Africa 1

Abstract

Abstract Foreign direct investment (FDI) inflows are crucial for economic development. To attract them, countries have typically used reductions in corporate income tax (CIT) rates. This paper empirically assesses the impact of such CIT rate changes on FDI net inflows in Africa. Using a dynamic spatial Durbin model with fixed effects, our results show that cuts in CIT rates increase FDI net inflows in the host country and in the neighbouring countries in the short and long run. These results are robust to the use of alternative spatial weighting matrices as well as the inclusion of additional controls in the baseline specification. Furthermore, we find a strategic complementarity in FDI inflows between the countries in our sample, suggesting that an increase in FDI inflows in a host country is likely to stimulate FDI inflows of its neighbours.