Taxation, financial and regulatory environment as drivers of Foreign Direct Investment in Sub Saharan Africa

Abstract

Despite its resource endowment, Sub Saharan Africa remains one of the poorest regions in the world, and despite being among the fastest growing economies, per capita income in the region remains the lowest globally. Foreign direct investment (FDI) is widely regarded as one of the key catalysts of growth. This study uses panel data from 46 Sub Saharan African countries from 1985 to 2023 to analyse the effects of taxation and other environmental factors on FDI. A fixed effects model indicates that lower taxation significantly influences FDI, and that the ease of importing, exporting, and starting a business also significantly influences foreign investment. A conducive financial environment, including the distribution of commercial bank branches, domestic credit to the private sector, lending rates, and deposit rates, is also found to significantly influence FDI. The analysis further shows that companies located in Sub Saharan African economies face higher tax burdens than firms elsewhere in the world, implying a need for governments in the region to adopt more competitive tax policies to attract foreign investment that can, in turn, generate employment and improve living standards. To the authors' knowledge, this is the first study to systematically examine the impact of taxation on FDI across the Sub Saharan African region.