INTERVENING EFFECT OF INTERNATIONAL COMPETIVENESS ON THE RELATIONSHIP BETWEEN TAX INCENTIVES AND FOREIGN DIRECT INVESTMENT AMONG THE EAST AFRICA COMMUNITY PARTNER STATES

Abstract

Countries around the world employ different efforts aimed at attracting more FDI, top most being tax incentives. Appropriate fiscal policy framework establishes tax incentive that improves country’s investment climate. However, tax incentives may at times not adequately compensate for poor investment climate in developing countries resulting from poor infrastructure, lack of trade openness, weak judicial system, small market size and most importantly political instability. Therefore, this study sought to determine the moderating effect of investment climate on the relationship between tax incentives and FDI among the East Africa Community partner states. The study was carried out using data relating to the five states in the East Africa Community: Tanzania, Rwanda, Kenya, Burundi, and Uganda.   Secondary data covering a period of 15 years from 2002 to 2016 was used. The results revealed that tax holiday and the period of losses carried forward had an insignificant and positive relationship with FDI inflows but investment allowances had an insignificant negative relation with FDI inflows. The study revealed that consumer prices and tax holiday had a positive and statistically insignificant relationship with FDI and that investment allowances and the period of losses carried forward had a negative and statistically insignificant relationship. The findings also revealed that tax holiday and export growth had a negative and statistically significant relationship while investment allowances and the period of losses carried forward and export growth had a negative and insignificant relationship. The findings further revealed that consumer prices had a statistically insignificant positive relationship with FDI inflows while export growth had negative and statistically insignificant relationship with FDI. Finally, the study found that tax holiday, consumer prices and export growth had negative and statistically insignificant relationship with FDI while investment allowances and the period of losses carried forward had a positive and statistically insignificant relation with FDI.