The effect of tax and economic freedom on capital investment and foreign direct investment: empirical evidence from a panel of countries around the world

Rana Albahsh

Afro-Asian Journal of Finance and Accounting, 2021, vol. 11, issue 2, 266-289

Abstract: Investment in the home country or abroad has become an important strategy for companies to survive and grow. It exposes these companies to several financial and economic hazards. This paper employs cross-country tax rates and economic freedom regressions for a sample of 82 countries to examine the determinants of investment and foreign direct investment (FDI) between 2010 and 2016. Besides, it analysis the role of economic freedom factors (legal system, sound money system, regulations, and trade freedom) and economic factors [gross domestic product (GDP) growth, trade level, inflation, and GDP per capita]. While the results of the study agree these factors are important to investments, FDI reflects a higher sensitivity to these factors. A sound money system and trade freedom have a high influence on FDI. The results also show that companies are eager to expand their investments wherever they find welcoming markets, financially and economically. This can benefit policymakers in home or host countries to increase investments and FDI.

Keywords: capital investment; foreign direct investment; FDI; corporate tax; indirect tax; economic freedom; trade-off-theory; investment theory; inflation; regulations; money system; legal system. (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:ids:afasfa:v:11:y:2021:i:2:p:266-289

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