Impact of Taxation on Foreign Direct Investment in Pakistan

Abstract

Foreign Direct investment is one of the major pillars of the country’s economy. In case of developing countries, the significance of foreign direct investment is even higher than the case of developed ones (Ahmad, 2021). Therefore, for the countries, like Pakistan, it is necessary to focus on the factors and techniques that can help to improve the foreign direct investment. Foreign direct investment can help in improving different sectors of a country including education, industry, job opportunities and healthcare. However, the increase in taxation and decrease in exchange rates has impacted the foreign direct investment (Ahmed & Martinez-Zarzoso, Blessing or Curse: The Stabilizing Role of Remittance, Foreign Aid and FDI to Pakistan, (May 7, 2018)). Therefore, the current study is aimed to analyze impact of varying factors including taxation rates, interest rates, exchange rate and GDP on Foreign Direct Investment (FDI). Time series data is used analyze the impact of set variables on FDI. The statistical analysis has provided significant insight about the exchange rates and GDP that have a direct impact of FDI. However, the taxation rate has resulted in negative relation with FDI. Interest rate has little or no impact on FDI. Furthermore, de-valuation of currency has also impacted the FDI in Pakistan in a negative manner. In this regard, the government has to decrease the taxation rates and reconsider the priorities for the improvement of FDI (Ahmed & Ullah, 2017).