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IMPACT OF TAXATION ON FOREIGN DIRECT INVESTMENT IN NIGERIA
Abstract: The main goal of the study is to investigate the impact of taxation on foreign direct investment in Nigeria from 1980 to 2015. The study utilized cointegration test, vector error correction model (VECM) and Pairwise Granger causality technique in the analysis. The variables employed in the study include foreign direct invest (FDI), tax revenue (TAR), openness to trade (OPNTR), exchange rate (EXR), inflation rate (INFR) and money supply (MS). Stationarity test was conducted via the application of the Augmented Dickey-Fuller (ADF) unit root test. The results showed that all the variables were non-stationary at level; however, all the variables became stationary after first differencing. The results of the cointegration test indicated long run relationship among the variables under study. Furthermore, the results of the VECM showed that tax revenue and exchange rate have positive and insignificant impact on foreign direct investment (FDI) in Nigeria. The results further indicated that openness to trade and inflation rate have negative and insignificant impact on foreign direct investment. However, the results revealed that money supply has positive and significant impact on FDI in the economy. Finally, the results of the Pairwise Granger causality test indicated no causality between taxation and foreign direct investment in Nigeria. Similarly, it showed no causality between openness to trade, exchange rate, inflation rate and foreign direct investment in the economy. However, the results showed unidirectional relationship between money supply (MS) and foreign direct investment (FDI) with causality running from MS to FDI. Thus, the study recommends that government should go ahead to apply tax as a tool for attracting more foreign direct investment into Nigerian economy since tax revenue has positive impact on FDI. More so, government should as a matter of urgency discontinue exchange rate devaluation policy adopted to attracting FDI into the economy, as it does not affect the inflow of FDI of the country significantly.
Keywords: Taxation, Foreign direct investment, Cointegration, Vector error correction model, Granger causality