Therefore, this research also seeks to estimate the marginal levels of tax revenue and external debt that will reverse the effect on FDI inflows. In addition, there is further investigation on the relationship between FDI and its determinants without including Singapore. In conclusion, according to the empirical results, there is a significant long-run relationship between FDI inflows and their factors.
Apart from that, the results showed that there is a non-linear relationship between the combined effect of tax and debt on FDI inflow.
INTRODUCTION
Background of Study…
- Foreign direct investment, tax and debt
Therefore, high rate of foreign debt usually does not contribute to a good reputation of the host country based on the perspective of foreign investors. Based on the figure 1.1, it shows the non-linear relationship of external debt and FDI inflows for the high debt country, Singapore. Based on the figure 1.4, it shows a non-linear relationship between the variable of tax revenue and foreign debt.
First, government-generated tax revenues have failed to reduce foreign debt.
Problem Statement
At the same time, when a country introduces a higher tax rate, it tends to reduce the rate of FDI inflow due to the cost of doing business and the investment will turn out to be expensive according to the views of foreign investors (Jones & Temouri, 2016). In this case, these government actions produced a dynamic result in FDI inflows to the Southeast Asian region. However, Vietnam is still unable to attract foreign investors by generating a higher rate of FDI inflow for its country.
Thus, this study aims to further investigate the debt and tax characteristics for foreign direct investment inflows among all countries in the Southeast Asian region.
Objective of Study
- General objective
- Specific objective
Research Questions
In this section, the combined effect of taxes and foreign debt that will promote FDI inflows in the studied countries is highlighted. Hence, the net effect of external debt and taxes creates a negative effect on FDI inflows. The flow of the analysis is the investigation of the long-term and short-term relationship between FDI inflows and its determinants, the combined effect of taxes, external debt on FDI inflows and the non-linear relationship between taxes and FDI inflows.
In this section, the analysis reported on the short-run relationship between FDI inflow and its determinants.
Significance of Study
- Investment Development Path (IDP)
- Eclectic Paradigm
- Concluding remark on the theories
Development of Literature Over-time
- Development of conventional variables
- Expansion on determinants
- Starting point of diversion
Based on the study by Ahmadi-Esfahani and Phillips (2008), it was found that exchange rate has a positive relationship with FDI inflow. Also, based on the study of Gedik (2013) and Falk (2016), the tax rate is categorized as a cost-based factor, so it is not desirable. Similarly, based on Adepeju and Babatunde (2012), statutory tax rate is significantly negatively related to FDI in the case of Nigeria.
Also, based on Azam and Lukman (2010), he stated that external debt and FDI have a significant negative relationship as debt burden will discourage FDI inflow. For example, the negative relationship between external debt and FDI can be explained by several reasons. Based on the studies of Azam and Lukman (2010), Ashja and Ostadi (2014), external debt is negatively related to FDI because external debt acts as a financial disadvantage for attracting FDI and will affect in the future vision of foreign investors to create a negative expectation.
Moreover, Awan, Ahmad, Hassan and Shahid (2014) also determined a negative relationship between external debt and FDI in Pakistan. For another point of view, some researchers such as Kiprotich (2015) and Cetin and Kalayci (2012) are of the opinion that debt can also serve as one of the main sources to boost FDI provided if the country is able to repay the foreign debt. Based on their results, there is a positive relationship between external debt and FDI, but if the debt condition poses a country risk to those countries, the increase in foreign debt will discourage investors from making foreign investments in that country.
From the perspective of Mugambi (2016), he found that there is a positive relationship between external debt and taxes, but both will discourage FDI due to the increase in the cost of doing business as the heavily indebted country can increase taxes ( raise income) to finance the external part. debt in the case of Kenya. Furthermore, Warburton (2003) examined the effect of external debt on highly indebted countries and the researcher mentioned that the issue of debt overhang is the main factor that discourages economic growth and development.
METHODOLOGY
Introduction
Econometric Model
- Main model
- Tax debt threshold
- Tax square threshold
The reason behind this is mainly due to the non-linearity and lack of consistency of the data. Furthermore, the relationship between tax rate and FDI is expected to be in a negative relationship (Mugambi, 2016). Since higher tax rate will result in higher costs for the foreign investors, (<0). Furthermore, RGDP, which indicates market size, is expected to have a positive relationship with FDI inflows, as high market size encourages economies of scale can attract FDI inflows, >0) (Azam.
Therefore, it is expected to have a positive sign of the exchange rate of its relationship with FDI assuming direct quotation, (>0). To further decode the question of what is the level of external debt that changes the effect between FDI inflows and external debt, LNDUBT*TAX is included to form a threshold model. This high collinearity is due to the data from TAX and DEBT look the same in the perspective of Eviews.
So when the interactive term (LNDEBT*TAX) is included, the LNDEBT variable is removed to resolve the singular matrix error. In this proposed model, tax^2 is included in the main model, where it serves to estimate the threshold levels of tax revenue that will trigger and cancel out the effect of FDI inflows. The relationship between tax and FDI is the hypothesis that FDI will increase first when the tax increases.
Since it is logical to have tax charges in a country where the rate is so there is FDI inflow by this .. equation 8), a further increase in tax will reduce FDI inflow. After the tax debt threshold and the tax square threshold, some may doubt why the analysis of DEBT against FDI inflow under different tax conditions is not done in this study.
Data Collection Methods
As an increase in the tax rate will increase the cost of investment, which will later distract the foreign investor to invest in the home country. The steps below showed how to find the optimal tax rate to charge just before their relationship changes. The reason for this is because the TAX among these eight SEA countries is roughly the same.
This study has collected the data of the variables for 15 years from different sources and all of them are secondary data. Sources included the World Bank database, United Nations Conference on Trade and Development (UNCTAD), The World Factbook-Central Intelligence Agency, International Monetary Fund (IMF), Asian Development Bank and Google Book for Data, where most of the data are adopted from the World Bank Database. Details of the sources for each variable and also the definition of the variables are listed in the table below (Table 3.1).
Tax can be defined as the charge levied by the government of a country for its economic support or for the purpose of helping the public of that country (Aamir et al., 2011). External debt is one of the parts of the total debt of a country that is owed to creditors outside the country. The definition of GDP is dependent on the total market value of each final goods and services produced in the country in a usually one-year period (Kira, 2013).
Angbazo (1997) defined interest as the money paid by the borrower to the lender for lending money or assets. Exchange rate defined as the relative price differences between goods and services expressed in a single currency.
Econometric Method
- Panel data approach
- Panel unit root test
- Levin Lin Chu (LLC)
- Im Pesaran and Shin (IPS)
- Autoregressive Distributed Lag (ARDL)
According to model (2) in Table 4.4, this estimated result shows that there is a non-linear relationship between LNRGDP and FDI inflow. It is also consistent with the findings of Nguyen and To (2017) and Elafif and Gangopadhyay (2016), who also find a non-linear relationship between economic growth and FDI inflows. From this observation, the net effect between tax and debt creates a negative impact on FDI inflow.
From model (4) in Table 4.4, the result shows a non-linear relationship between TAX and FDI inflow, but it has a different expected sign than assumed in Chapter 3. Initially, the negative relationship between TAX and FDI inflow indicated that as TAX increases, FDI inflow is reduced. This positive effect of TAX on FDI inflow may be due to the strength of the country as it will increase the confidence of the investor.
In this section, the short-term analysis between FDI inflow and its determinants is presented. Thus, the overall relationship between taxes, external debt and FDI inflows that excluded Singapore is examined to show the peculiarity of Singapore. As we refer to Table 4.7, model (5) is the ARDL model which determines the long-run relationship between FDI inflow and its determinants.
In summary, this research concluded that external debt and taxes play an important role in FDI inflows to the selected countries. If the positive effect of external debt dominates the negative effect of tax, the overall effect on FDI inflow will be positive, and vice versa. Based on the findings in Chapter 4, this study led to the country's political influence in attracting FDI inflow.
This is because of their negative tax relationship with FDI inflows as the tax is increased to a certain extent.
