How tax structure shapes FDI attractiveness and economic growth in developing economies?

Abstract

This study examines how tax structure shapes FDI attractiveness and economic growth in developing countries, focusing on two major tax types: taxes on goods and services and taxes on income, profits, and capital gains. We used panel data from 57 developing countries over the period 2000–2021 and applied the fixed-effects, quantile regression, and 3SLS models, with the method of moments quantile regression technique and PROCESS Model 4 as robustness checks. The results show that both tax types are generally associated with lower economic growth but have opposite effects on FDI attractiveness; taxes on goods and services tend to enhance FDI attractiveness, whereas taxes on income, profits, and capital gains reduce FDI attractiveness. In low-growth countries, however, both tax categories positively affect economic growth. Moreover, FDI attractiveness mediates the tax–growth relationship: income-based taxes reduce growth by discouraging FDI, while consumption-based taxes partly offset their negative growth effects by attracting FDI. Overall, the findings highlight that tax design matters as much as revenue levels for investment-led growth in developing countries.