Corporate Tax Rate, International Financial Reporting Standards Adoption and Foreign Direct Investment in Sub-Saharan Africa

Abstract

The role that foreign direct investment plays in an economy cannot be overlooked. Governments in the quest to attract foreign investors have implemented various policies. Among these investment pulling strategies, corporate taxation and financial reporting reforms have been actively used. The effectiveness of these strategies has been continuously debated as there has been inconsistency in the various findings. Using tax as a pull factor might lead to loss of tax revenue while IFRS adoption may increase cost considering the transitioning from local GAAPs to international standards. This thesis builds on already existing literature by examining these two factors jointly but not in isolation as has been done in previous studies. Using the two-step system GMM, the combined effect of corporate tax rate and IFRS adoption on FDI was analysed. Data on 24 selected countries in sub-Saharan Africa from the year 2004 to 2017 were obtained from different sources. The eclectic theory was used as the theoretical model for the study. Results from the study showed that at average corporate tax rate, adopting IFRS directly increased FDI by 5.89 percent more compared to not adopting IFRS. When corporate tax rate is increased by 100 percent, FDI will fall by 15.8 percent in countries that have adopted IFRS while countries that have not adopted will experience a 195 percent fall in FDI. Investigating the threshold effect of corporate tax rate on FDI, the study found a U-shape showing the optimum corporate tax rate to FDI of 29.89 percent. The granger causality test showed a unidirectional relationship from corporate tax rate to FDI and not vice versa. It was recommended that countries should adopt IFRS. In countries where IFRS have been adopted, corporate tax rate should be increased to maximize revenue. Also, to attract FDI, corporate tax rate should not exceed 29.89 percent. © University of Cape Coast