Impact of foreign direct investment inflows on tax revenue: The case of OECD countries

Globalization process has led considerable increases in the flows of foreign direct investment flows in the world 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. However, foreign direct investment inflows have potential to affect the total taxes indirectly, which is an important component of public sector revenues, through economic activity. On the other hand cuts in the rate of corporation tax or giving exemption from taxes for a length of time and giving legal privileges to the multinational corporations in profit transfer by many countries affect tax revenues negatively. 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) cointegration test and Dumitrescu and Hurlin (2012) causality test. We found that there was long run relationship among foreign direct investment inflows, economic growth and total tax revenues in the long run. 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