The Effectiveness of Tax Incentives in Attracting Investment : Panel Data Evidence from the CFA Franc Zone

In this paper, we investigate to what extent tax incentives are effective in attracting investment in Sub-Saharan Africa. We test the neo-classical investment theory prediction that tax incentives, by lowering the user cost of capital, raise investment. Next to tax incentives, we also estimate the i...

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Main Authors:	Van Parys, Stefan, James, Sebastian
Format:	Journal Article
Language:	EN
Published:	2012
Subjects:	Capital Investment Capacity E220 Fiscal Policy E620 International Investment Long-term Capital Movements F210 Multinational Firms International Business F230 Taxation, Subsidies, and Revenue: General H200 Economic Development: Financial Markets Saving and Capital Investment Corporate Finance and Governance O160 Fiscal and Monetary Policy in Development O230
Online Access:	http://hdl.handle.net/10986/4993

id	okr-10986-4993
recordtype	oai_dc
spelling	okr-10986-49932021-04-23T14:02:20Z The Effectiveness of Tax Incentives in Attracting Investment : Panel Data Evidence from the CFA Franc Zone Van Parys, Stefan James, Sebastian Capital Investment Capacity E220 Fiscal Policy E620 International Investment Long-term Capital Movements F210 Multinational Firms International Business F230 Taxation, Subsidies, and Revenue: General H200 Economic Development: Financial Markets Saving and Capital Investment Corporate Finance and Governance O160 Fiscal and Monetary Policy in Development O230 In this paper, we investigate to what extent tax incentives are effective in attracting investment in Sub-Saharan Africa. We test the neo-classical investment theory prediction that tax incentives, by lowering the user cost of capital, raise investment. Next to tax incentives, we also estimate the impact on investment of other investment climate variables that are under direct control of the government, such as the transparency and complexity of the tax system, and the legal protection of foreign investors. In developing countries, these variables might be as important as or even more important than the tax variables themselves. Therefore, we analyze the policy changes in tax incentives and in the other investment climate variables for 12 CFA Franc Zone countries over the period 1994-2006. Because of their common currency (the CFA Franc) and common language (French) these countries constitute an exceptional basis of comparison to evaluate their 'policy experiments'. The use of panel data econometrics with fixed country and year effects allows us to isolate the impact of the policy changes on investment, as if it were a difference in differences analysis with multiple policy changes. We find no robust positive relationship between tax holidays and investment in the CFA Franc zone. However, increasing the number of legal guarantees for foreign investors and reducing the complexity of the tax system helps to attract investment. 2012-03-30T07:30:44Z 2012-03-30T07:30:44Z 2010 Journal Article International Tax and Public Finance 09275940 http://hdl.handle.net/10986/4993 EN http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Journal Article Africa
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	EN
topic	Capital Investment Capacity E220 Fiscal Policy E620 International Investment Long-term Capital Movements F210 Multinational Firms International Business F230 Taxation, Subsidies, and Revenue: General H200 Economic Development: Financial Markets Saving and Capital Investment Corporate Finance and Governance O160 Fiscal and Monetary Policy in Development O230
spellingShingle	Capital Investment Capacity E220 Fiscal Policy E620 International Investment Long-term Capital Movements F210 Multinational Firms International Business F230 Taxation, Subsidies, and Revenue: General H200 Economic Development: Financial Markets Saving and Capital Investment Corporate Finance and Governance O160 Fiscal and Monetary Policy in Development O230 Van Parys, Stefan James, Sebastian The Effectiveness of Tax Incentives in Attracting Investment : Panel Data Evidence from the CFA Franc Zone
geographic_facet	Africa
relation	http://creativecommons.org/licenses/by-nc-nd/3.0/igo
description	In this paper, we investigate to what extent tax incentives are effective in attracting investment in Sub-Saharan Africa. We test the neo-classical investment theory prediction that tax incentives, by lowering the user cost of capital, raise investment. Next to tax incentives, we also estimate the impact on investment of other investment climate variables that are under direct control of the government, such as the transparency and complexity of the tax system, and the legal protection of foreign investors. In developing countries, these variables might be as important as or even more important than the tax variables themselves. Therefore, we analyze the policy changes in tax incentives and in the other investment climate variables for 12 CFA Franc Zone countries over the period 1994-2006. Because of their common currency (the CFA Franc) and common language (French) these countries constitute an exceptional basis of comparison to evaluate their 'policy experiments'. The use of panel data econometrics with fixed country and year effects allows us to isolate the impact of the policy changes on investment, as if it were a difference in differences analysis with multiple policy changes. We find no robust positive relationship between tax holidays and investment in the CFA Franc zone. However, increasing the number of legal guarantees for foreign investors and reducing the complexity of the tax system helps to attract investment.
format	Journal Article
author	Van Parys, Stefan James, Sebastian
author_facet	Van Parys, Stefan James, Sebastian
author_sort	Van Parys, Stefan
title	The Effectiveness of Tax Incentives in Attracting Investment : Panel Data Evidence from the CFA Franc Zone
title_short	The Effectiveness of Tax Incentives in Attracting Investment : Panel Data Evidence from the CFA Franc Zone
title_full	The Effectiveness of Tax Incentives in Attracting Investment : Panel Data Evidence from the CFA Franc Zone
title_fullStr	The Effectiveness of Tax Incentives in Attracting Investment : Panel Data Evidence from the CFA Franc Zone
title_full_unstemmed	The Effectiveness of Tax Incentives in Attracting Investment : Panel Data Evidence from the CFA Franc Zone
title_sort	effectiveness of tax incentives in attracting investment : panel data evidence from the cfa franc zone
publishDate	2012
url	http://hdl.handle.net/10986/4993
_version_	1764393526676684800

The Effectiveness of Tax Incentives in Attracting Investment : Panel Data Evidence from the CFA Franc Zone

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