Asih, Nora Dwi Prasasti (2020) Assessing the Effects of Tax Policy on Foreign Direct Investment in Southeast Asia. Other Degree thesis, Victoria University.

Abstract

The benefits generated by foreign direct investment (FDI), such as transfer of technology and increase in productivity, have motivated governments, particularly in developing countries, to consider attracting FDI as one of their primary agenda. Various policies have been employed to promote FDI, including tax policy. In Southeast Asia, the prevalent use of tax policy to attract FDI can be observed in the declining trend of corporate income tax (CIT) rate and the widespread use of tax incentives. Nevertheless, previous studies have shown that the effect of tax policy on FDI is often inconclusive. Further, in the context of Southeast Asia, very few studies have investigated the effect of CIT on FDI—with mixed findings—and tax incentives remain an area that is under-researched. This study aims to fill this gap by investigating the effect of CIT and tax incentives on FDI into Southeast Asia. Accordingly, the results may assist policymakers in making informed decisions on the efficacy of tax policy to attract FDI and provide alternative policy options that can be utilised to promote FDI. To assess the effect of tax policy on FDI, this study employs a panel data analysis with the sample consisting of six Southeast Asian countries namely Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam, for the period 1996–2017. Following the eclectic paradigm, an extensive set of host country characteristics are included as the potential determinants of FDI, including economic determinants, policy variables and business facilitation. This study finds resource seeking as the primary motivation of FDI into Southeast Asia, which is shown by the positive and significant effect of natural resources endowment. The results also highlight the importance of economic and political stability, quality of infrastructure and control of corruption as the key determinants of FDI into Southeast Asia. In contrast to expectation, labour cost is found to have a positive effect on FDI, which implies that FDI into Southeast Asia may not be motivated by cheap labour. The results for tax policy are counterintuitive because CIT is found to have a positive effect on FDI, whereas tax holiday and investment allowance show negative effects, albeit only statistically significant for investment allowance. While these results should not be interpreted to imply that FDI is attracted to countries with high CIT rate, they provide empirical evidence that lowering CIT rate and offering tax incentives may not help to attract FDI into Southeast Asia. The positive effect of CIT on FDI may be considered an indicator of the importance of better provision of public goods and services. Therefore, rather than lowering CIT and offering tax incentives, Southeast Asian countries should improve the overall investment climate, such as by improving the quality of infrastructure and controlling corruption.

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