International Tax Competition and Foreign Direct Investment in the Asia-Pacific Region: A Panel Data Analysis

Abstract

Purpose - The purpose of this study is to investigate how a country’s competitive tax policy influences its inward foreign direct investments (FDI) in the Asia-Pacific region, even when given particular constraints (e.g., population, public governance, skilled labor, and so on) exist.

Design/methodology/approach - The paper uses the system GMM estimation approach to test the hypothesis. Data on FDI, corporate income tax, and various confounding factors were drawn from Ernst and Young’s worldwide corporate tax guide, the World Bank, and other sources to create a panel of 28 economies over the period 2000-2016.

Findings - The present research confirms the negative association between corporate income tax (CIT) and FDI inflows. The effects of other confounding factors on FDI net inflows are also supported (e.g., connectivity, GDP per capita, population, skilled labor, and trade openness). Our results support the argument that foreign investments may be more sensitive to CIT. Therefore, CIT is an effective indicator to observe international tax competition.

Originality/value - The present research uses rich data on statutory CIT and other economic and public governance factors to investigate the relationship between tax competition and FDI inflows in the Asia-Pacific region. The findings add important supplements to the nuanced understanding of the political-economic dynamics in this region, especially when cut-throat tax competition, trade tensions, and stagnant economic growth have been key challenges for global economies.