The Impact of Fiscal Policy on Foreign Direct Investment Inflows: A Study of India and Select Asian Economies

VISION: Journal of Indian Taxation, Vol. 1, Issue 1, Jan-June.

24 Pages Posted: 15 May 2014

See all articles by Niti Bhasin

Niti Bhasin

University of Delhi - Department of Commerce

Date Written: 2014

Abstract

While the role of taxation in influencing FDI has received considerable attention in literature, there has been very less work on examining the role of fiscal policy as a whole on FDI inflows. The dimension of fiscal policy that relates to the expenditure of the government has not received much attention in terms of its impact on FDI. This study would attempt to bridge the gap in literature by examining the impact of both the revenue and expenditure side of fiscal policy on FDI inflows in India and other select economies of the Asian region. The paper identifies the determinants of FDI flows with special reference to fiscal policy variables, namely tax treaties and developmental expenditure of the government. With the help of principle component regression, we have estimated a panel equation with the Least Squared Dummy Variables (fixed effects model) approach. The determinants which have emerged as significant are FDI openness and infrastructure. Our variables of interest, that is, the fiscal policy variables turn out to be insignificant. Thus while a competitive fiscal policy may facilitate operations of business, it is still not a prime consideration in investment decisions.

Keywords: Fiscal policy, Foreign direct investment, tax treaties

Suggested Citation

Bhasin, Niti, The Impact of Fiscal Policy on Foreign Direct Investment Inflows: A Study of India and Select Asian Economies (2014). VISION: Journal of Indian Taxation, Vol. 1, Issue 1, Jan-June. , Available at SSRN: https://ssrn.com/abstract=2436798

Niti Bhasin (Contact Author)

University of Delhi - Department of Commerce ( email )

Department of Commerce, Delhi School of Economics
University of Delhi
Delhi, 110007
India

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