Effect of corporate Income Tax Rate on Greenfield Investment: Evidence from selected African Countries

Abstract

The competition to attract greenfield foreign direct investment (FDI) among countries, due to its benefits, has taken the form of a reduction in the corporate tax rate globally over the decade. Aiming to determine the tax effect in attracting new investment into a country, the study focused on three objectives: the trend of corporate income tax and greenfield FDI, the effect of corporate tax rate on greenfield investment and the determinants of greenfield investment. In estimating the objectives of the study, the fixed effect, random effect and system GMM estimation techniques were employed on annual panel data of 19 selected African countries from 2007 to 2016. The results of the study found that corporate income tax rate had a declining trend over the past decade whiles greenfield FDI had a fluctuating trend. Also, a reduction in corporate income tax rate attracts the inflow of greenfield FDI. The last objective showed that market size, purchasing power, inflation, country risk and agglomeration effect were important determinants of greenfield investment. Based on the findings of the study, it is recommended that there is the need for the governments of African countries to reduce corporate income tax rate, institute policies to reduce inflation and promote a sound, violence free and friendly environment that would attract greenfield investment inflows.