Tax Revenue and Foreign Direct Investment in Bangladesh: An Empirical Analysis

Sakib B. Amin, Farhan Khan, Farhana Shahnaz and Maayesha Tasneem Chowdhury

As per the common narrative, Foreign Direct Investment (FDI) is a crucial source of capital investment. Most of the developing countries try to attract FDI for improving their domestic investment scenario. However, FDI inflow may be hampered due to high tax revenue in developing countries. To the best of our knowledge, no studies have been conducted to investigate the underlying relationship between FDI and tax revenue in Bangladesh. Thus, the core objective of this paper is to analyze the impact of tax revenue on FDI with the help of time series data ranging from 2001-2015. According to Johansen’s cointegration test result, concerned variables are cointegrated in the long run. By employing the Granger causality test, we have found that there is a unidirectional causality running from tax revenue to FDI in the long run. For long run estimation, we have used Dynamic Ordinary Least Square (DOLS) approach. According to the estimation result, the coefficient of tax revenue is negative indicating an inverse relation with FDI. These results may help policymakers to come up with proper policies to boost the economy of Bangladesh.