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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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 |
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Digital Repository |
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Foreign Institution |
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Digital Repositories |
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World Bank Open Knowledge Repository |
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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 |
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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 |