FROM 1994 - 2018
By
Muhammad Arvito Siregar 11609002
BACHELOR’S DEGREE in
ACCOUNTING DEPARTMENT
FACULTY OF BUSINESS AND COMMUNICATION
SWISS GERMAN UNIVERSITY The Prominence Tower
Jalan Jalur Sutera Barat No. 15, Alam Sutera Tangerang, Banten 15143 - Indonesia
July, 2020
Revision after Thesis Defense on July 6, 2020
Muhammad Arvito Siregar
STATEMENT BY THE AUTHOR
I hereby declare that this submission is my own work and to the best of my knowledge, it contains no material previously published or written by another person, nor material which to a substantial extent has been accepted for the award of any other degree or diploma at any educational institution, except where due acknowledgement is made in the thesis.
Muhammad Arvito Siregar
_____________________________________________
Student Date
Approved by:
Ir. Nurdayadi, M.Sc.
_____________________________________________
Thesis Advisor Date
Sumini Salem, BSc., SE, MM, M.BA
_____________________________________________
Thesis Co-Advisor Date
Dr. Nila Krisnawati Hidayat, SE, MM
_____________________________________________
Dean Date
Muhammad Arvito Siregar
ABSTRACT
The Effect of Corporate Income Tax Rate on Foreign Direct Investment: Empirical Evidence of ASEAN Countries from 1994 - 2018
By
Muhammad Arvito Siregar Ir. Nurdayadi, MSc.
Sumini Salem, BSc., SE, MM, M.BA
SWISS GERMAN UNIVERSITY
This study is conducted to understand and explore the relationship and significance of Corporate Income Tax (CIT) rates variation toward the level of FDI inflows of ASEAN countries from 1994 to 2018. In producing a more reliable result several control variables are used: Gross Domestic Product, Openness, Inflation and Unemployment. Under the estimation method of fixed effect model, the results of this research show that CIT rate has a negative and significant relationship while 3 of the control variables also have a significant relationship. Moreover, this study is also interested in filling the gap of the effectiveness of CIT rate reductions in attracting FDI into ASEAN. From the univariate level test, it is found that FDI increases significantly after the implementation of CIT rate reductions. Then it is concluded that CIT rate and GDP growth are the key determinants in affecting the decision in doing FDI by foreign investors. While inflation, openness and unemployment are not the key factors in affecting FDI. Furthermore, the use of CIT rate reductions are also effective in attracting FDI as the past reductions that have been made statistically impacted the FDI inflows to increase.
Keywords: Corporate Income Tax Rate, Foreign Direct Investment, ASEAN, Gross
Domestic Product, CIT Rate Reduction.
Muhammad Arvito Siregar
© Copyright 2020 by Muhammad Arvito Siregar
All rights reserved
Muhammad Arvito Siregar
DEDICATION
This thesis is dedicated to my loving and supportive parents and family.
Muhammad Arvito Siregar
ACKNOWLEDGEMENTS
All praises and gratitude to ALLAH SWT, whom His uncountable blessings have helped in completing this thesis report in time.
First and foremost I would like to express my gratitude to my family, Ayah, Bunda, Alka & Marsa for always supporting in every possible way they could. I would also like to thank my classmates Alwin, Arvin, Dhea, Fachri, Pandu & Veren for all the good times and the hard times that we’ve been through together for the past 4 years. I will surely miss all the fun times, stressful moments, classes and study sessions that we had over the last 8 semesters of our study in SGU. Thank you for keeping me motivated until this final stage in our study as an accountant.
Also to Pak Nurdayadi, my thesis advisor, I am very thankful and grateful for the constant patience and guidance that you have given to me over this thesis period.
Thank you for being the best advisor that patiently guide and help me with numerous inputs in every step of this thesis writing despite the hectic schedule that you are currently facing. I would also like to thank Ms. Sumini, my co-advisor, for her readiness and willingness in guiding me during the final stages of my thesis report.
Deepest gratitude is also expressed to all accounting lectures, Pak Alfi, Ms. Imelda, Pak Indra, Ms. Neneng and Pak Yosman, whom have been very kind in sharing their knowledge, expertise and experiences throughout my study in SGU. It was a really pleasurable and memorable time learning from them.
Lastly, my gratitude and appreciation is to those, who have not been mentioned
above, yet they have explicitly or implicitly helped me in reaching to this point.
Muhammad Arvito Siregar
TABLE OF CONTENTS
Page
STATEMENT BY THE AUTHOR ... 2
ABSTRACT ... 3
DEDICATION ... 5
ACKNOWLEDGEMENTS ... 6
TABLE OF CONTENTS ... 7
LIST OF FIGURES ... 9
LIST OF TABLES ... 10
CHAPTER 1 - INTRODUCTION... 11
1.1 Background ... 11
1.2 Problems ... 15
1.3 Research Questions... 17
1.4 Research Objectives ... 17
1.5 Scope and Limitations ... 17
1.6 Significance of Study... 17
1.7 Thesis Structure ... 18
CHAPTER 2 – Literature Review ... 19
2.1 Tax ... 19
2.1.1 Corporate Income Tax (CIT) Rate ... 19
2.1.2 Tax Incentive ... 19
2.1.3 Corporate Income Tax (CIT) Rate Reductions ... 20
2.2 Foreign Direct Investment (FDI) ... 21
2.2.1 FDI as a Driver of Economic Development ... 22
2.2.2 Globalisation Effect on FDI ... 23
2.2.3 Motives of FDI ... 24
2.2.4 Determinants of FDI ... 24
2.2.4.1 Root and Ahmed’s Determinants of FDI ... 25
2.2.4.2 UNCTAD FDI Determinants Framework... 26
2.3 Theoretical Review ... 27
2.3.1 Neoclassical Investment Theory ... 27
2.3.2. Ownership, Location, & Internalisation (OLI) – Eclectic Paradigm ... 29
2.4 Previous Study ... 32
2.4.1CIT Rate Effect on FDI ... 32
CHAPTER 3 – Research Methods ... 41
3.1 Research Model ... 41
3.2 Type of Study ... 41
3.3 Theoretical Framework... 42
Muhammad Arvito Siregar
3.4 Population and Sample Target ... 43
3.5 Sampling Method ... 43
3.6 Sampling Size ... 43
3.7 Data Source and Collection ... 44
3.8 Variables ... 45
3.8.1 Dependent Variable ... 45
3.8.2 Independent Variable ... 45
3.8.3 Control Variables ... 46
3.8.4 Summary of Variables ... 48
3.9 Method of Analysis ... 49
3.9.1 Descriptive Analysis ... 49
3.9.2 Objective 1: To examine the extent of relationship and significances of the level of CIT rate toward FDI in ASEAN countries ... 49
3.9.2.1 Autocorrelation Test ... 49
3.9.2.2 Heteroscedasticity Test ... 50
3.9.2.3 Multicollinearity Test ... 50
3.9.2.4 Panel Data Regression Analysis ... 50
3.9.3 Objective 2: To Examine The Effectiveness of CIT Rate Reductions in Attracting FDI Inflows to ASEAN Countries ... 53
3.9.3.1 Paired t-test ... 53
3.10 Hypothesis ... 54
CHAPTER 4 – Results and Discussion ... 55
4.1 Data Analysis ... 55
4.1.1 Descriptive Analysis ... 55
4.1.2 Objective 1: To examine the extent of relationship and significances of the level of CIT rate toward FDI in ASEAN countries... 58
4.1.3 Objective 2: To examine the effectiveness of CIT rate reductions in attracting FDI inflows to ASEAN countries. ... 66
CHAPTER 5 – CONCLUSION AND RECOMMENDATIONS ... 71
5.1 Conclusion ... 71
5.2 Recommendations ... 74
Appendices ... 75
REFERENCES... 85
CURRICULUM VITAE... 91
Muhammad Arvito Siregar
LIST OF FIGURES
Figures Page
1. Figure 1.1 ASEAN CIT Rates 2017 ... 14
2. Figure 1.2 FDI Inflows ASEAN 2015 - 2018 ... 15
3. Figure 2.1 O – L – I Eclectic Paradigm ... 29
4. Figure 3.1 Research Model ... 41
5. Figure 3.2 Theoritical Framework ... 42
Muhammad Arvito Siregar