The determinants of FDI in Zambia with particular focus on tax incentives.

Thumbnail Image
Nkumbula, Nampaka
Journal Title
Journal ISSN
Volume Title
The University of Zambia
This paper examines the determinants of FDI in Zambia from 1970 to 2014, with a particular focus on tax incentives. FDI is seen as a tool for economic development and a means of bridging the saving and investment gap in developing nations. For this reason emerging economies grant special incentives to attract FDI. However, empirical literature is controversial about the effect of tax incentives on FDI inflows, given that there are other more significant factors. This study utilizes a vector error correction model to determine the long run and short run dynamics to establish the nature of relationship between FDI and its determinants. The empirical analysis reveals that both the corporate income tax (CIT) and tax incentive indicator (TII) significantly determine trends in FDI inflows in Zambia. However in the study CIT is more important for FDI than TII. Other significant factors that attribute to FDI inflows are trade openness, market size and inflation, were positively related and significant, while infrastructure development and natural resource abundance exhibited negative and significant influence on FDI. Based on these findings, the study recommends, the government can encourage FDI inflows by making its tax policy using CIT rates more conducive towards investment and reduce its dependence on natural resource (extractive) FDI. Further the government should ensure that the Zambian economy is more integrated to the world economy and policies should be directed to enhance growth in GDP/capita as a motivating factor for the attraction of FDI into Zambia.
Thesis of Master of Arts in Economics