Impact of Corporate Taxation on Foreign Direct Investment: A Sectoral Analysis

Abstract

Foreign Direct Investment (FDI) is a vital contributor to economic growth, and corporate taxation is one of the key factors influencing investment decisions. This research paper examines the impact of corporate tax rates on FDI across three major economic sectors: primary (agriculture and natural resources), secondary (manufacturing), and tertiary (services). Drawing on a comprehensive review of literature, including works from OECD and recent empirical studies, the paper identifies mixed results regarding the effectiveness of tax incentives. Using panel data from multiple countries and econometric modeling, the study finds that the manufacturing sector show a strong positive response to lower tax rates and is most responsive to corporate tax reductions, whereas the primary sector remains largely unaffected. The service sector demonstrates moderate sensitivity, depending significantly on the overall quality of institutions and governance. These findings suggest that sector-specific tax strategies, rather than one-size-fits-all policies, are more effective in attracting FDI. The study concludes by emphasizing the need for improved institutional frameworks to complement tax incentives and proposes future research to explore the long-term sustainability of FDI under different fiscal regimes and the interaction between tax policy and other economic variables.