EXAMINING TAX RATES, TERRORISM, AND TRADE OPENNESS AS DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN PAKISTAN: AN EMPIRICAL ASSESSMENT

Abstract

Foreign direct investment is crucial for economic development, particularly in emerging economies. Recently, developing countries has seen a rise in the rate of foreign direct investment (FDI) inflows on an annual basis. Tax holidays, investment allowances, exemptions, deductions, and other tax breaks are some of the incentives that a number of countries are providing in an effort to attract more foreign direct investment (FDI). The purpose of this study is to investigate how decisions about foreign direct investment (FDI) are affected by Pakistan's tax system. Specifically, researchers analyzed the impact of the statutory corporation tax rate, the real effective exchange rate, terrorism, and trade openness on foreign direct investment, with GDP growth serving as the controlled variable. Data from time series covering the years 1986 to 2021 are used. The data was compiled using the World Development Indicator (WDI) and the Economic Survey of Pakistan. Researchers used the empirical methods of Auto-Regressive Distributed Lag (ARDL) and Error Correction Model (ECM). The findings indicated that low taxes encouraged long-term FDI relationships between Pakistan and international investors. The statutory corporate tax rate, the real effective exchange rate, and the threat of terrorism are all independent variables that have a negative and significant influence on foreign direct investment. In addition, the findings showed that a significant and favorable influence on foreign direct investment (FDI) was achieved by an increase in both trade openness and GDP growth. It is suggested that developing countries decision-makers implement measures that reduce taxes in order to attract foreign direct investment. In this context, the government must review its foreign direct investment formulation goals.