ABSTRACT
Nigeria faces serious development challenges as its economic, social and physical indicators are worsening. There is a huge financing gap needed for the attainment of growth and development. Therefore, mobilizing additional public resources notably tax revenue, complimented with private international capital, particularly FDI as key financial resources, will engender the desired growth. This study sets out to investigate the effects of FDI inflow and tax revenue on economic growth in Nigeria over the period 1981 to 2018. It brings to bear the role of good governance, proxied by bureaucratic quality and corporate income tax revenue in enhancing or influencing the effects of FDI on economic growth in Nigeria. The study also assessed the impact of disaggregated tax revenue component on economic growth and the interrelationship among FDI, tax revenue and economic growth.
The study utilized Autoregressive Distributive Lag (ARDL) approach to cointegration and error correction methodology in examining the short and long run effects and Toda Yamamota (TY) non causality test to check the interrelationship among FDI, tax revenue and economic growth in Nigeria.
Findings from the study indicate that, though FDI improve economic growth in the long run, better institution proxied by bureaucratic quality influences the effects of FDI on economic growth positively, as corporate income tax revenue negatively and significantly influences FDI growth effect in Nigeria. Direct tax revenue (PIT) is showed to limit economic growth both in the short and long run, but indirect tax revenue (VAT) have positive and significant impact on economic growth also in the short and long run in Nigeria. The interrelationship among FDI, tax revenue and economic growth revealed a bidirectional causal relationship between FDI and economic growth as well as VAT and economic growth. Causality runs from CIT to economic growth, but economic growth does not Granger cause CIT revenue. Between FDI and tax revenue component, there is a bidirectional relationship between FDI and CIT, unidirectional causality run from FDI to VAT, as PIT Granger cause FDI in Nigeria. These results are robust to alternative estimation techniques. In light of the empirical evidence, the study recommends to government and policymakers the need to make the tax regime in the country more realistic by balancing revenue needs with the desire to attract foreign investment. It should be noted that the benefits of reducing tax rate in order to improve investment climate, do not always deliver optimal tax effects. Also, government should focus on accumulating brownfield FDI, as it delivers better growth outcome than emphasizing only attracting greenfield FDI.
