Fiscal Policy and the Growth of Foreign Direct Investment in Sub-saharan Africa (Selected Countries: Ghana, Kenya, Nigeria, and South Africa)

Abstract

This study evaluates the impacts of fiscal policy on foreign direct investment (FDI) in the Sub Saharan Africa (SSA) region, focusing on the selected countries of Ghana, Kenya, Nigeria, and South Africa. The study further examines FDI spillover potential in the SSA economies, including identifying the factors (fiscal or non-fiscal) that are likely to contribute to the region’s long-run FDI growth. The general increase in competition among developing countries to provide tax incentives has centered on the prospect of knowledge spillovers (among other benefits) that might result upon foreign investors establishing affiliates in the host countries. The Sub Saharan African countries, like those in other developing regions, have adopted a liberalized policy stance in the last decade and continue to provide incentives to foreign investors as a way of influencing FDI decisions. This increase in competition has therefore revived the long-standing debates on the importance of tax incentives in the FDI decisions of multinational corporations. Many have argued that tax incentives are not very important decision factors when multinationals are deliberating on where to locate their firms or plants, especially in the developing economies. Others, however, assert the opposite, that tax incentives are important considerations in the investors’ decisions. This study attempts to contribute to these debates focusing mainly on the tax incentives in SSA countries and the potential knowledge spillover benefit these countries hope to get in return and how that can be achieved. Ordinary Least Square Regression and cross-sectional and time series analysis are employed to make estimations and analyses of the historical data of four selected countries representing Sub Saharan Africa for 23 years (1980-2002). The pooled time series regression results show no evidence that fiscal incentives have attracted investments to SSA as a region, but variations exist between the nations in the region. The results show, however, that human capital and market size are most important determinants for FDI growth in SSA, supporting previous studies that human capital is fundamental to technology transfer and advancement in FDI growth. Political stability was also found to be very important to FDI growth in SSA countries, but deficits and tax rate both have negative impact on FDI. The implication is there for governments in SSA region to review their positions on the offer of fiscal incentives. To enhance FDI growth in the region, SSA countries should invest in their people and policy makers may need to employ policies that are more dynamic and tuned to the rapidly changing technology.