The Quest for Non-Resource-Based FDI: Do Taxes Matter?

IMF Working Papers, January 27, 2014

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Using manufacturing and services firm-level data for 30 sub-Saharan African (SSA) countries, taxation is not a significant driver for the location of foreign firms in SSA.
Other investment climate factors—such as infrastructure, human capital, and insitutions—are significant drivers of foreign firm location.
There is considerable contrast in behavior between vertical FDI (foreign firms producing for export) and horizontal FDI (foreign firms producing for local markets), but taxation is not a key determinant for either type of FDI.
Horizontal FDI is attracted to areas with higher trade regulations, indicating interest in protected markets.
Horizontal FDI is affected more by financing and human capital constraints, and less by infrastructure and institutional constraints, than is vertical FDI.

Data: manufacturing and services firm-level data disaggregated to analyze FDI behavior.
Geographic scope: 30 sub-Saharan African (SSA) countries.
Analytical focus: distinction between vertical FDI and horizontal FDI to identify differing determinants.

Policies aimed at attracting non-resource-based FDI in SSA should prioritize improving infrastructure, human capital, and institutions rather than relying principally on tax incentives.
To attract horizontal FDI, policymakers should consider measures that address financing and human capital constraints and recognize that protected-market features (higher trade regulations) can attract firms targeting local markets.
Strategies to promote vertical FDI should emphasize infrastructure and institutional improvements, given vertical FDI’s relative sensitivity to these factors.

Tidiane Kinda, "The Quest for Non-Resource-Based FDI: Do Taxes Matter?", IMF Working Paper, January 27, 2014.