The dual impact of tax evasion, does tax evasion incentivize or dampen FDI, perspectives from the emerging economies of BRICS and CIVETS blocs?

Abstract

This study examines the dual impact of tax evasion on foreign direct investment (FDI) in emerging economies, specifically the BRICS and CIVETS blocs. It aims to assess whether tax evasion incentivizes or deters FDI inflows and explores the role of macroeconomic factors in this relationship. The study employs panel data analysis using World Bank data from 1991 to 2017. The econometric model incorporates key macroeconomic indicators, including public debt, GDP per capita growth, unemployment, and inflation, to evaluate their influence on FDI trends. A comparative approach assesses the differences in FDI responses between BRICS and CIVETS economies. The results indicate that tax evasion significantly negatively impacts FDI inflows, with a more pronounced effect in CIVETS economies due to weaker institutional frameworks and heightened economic volatility. Conversely, economic growth and effective public debt management positively influence FDI inflows, emphasizing the critical role of macroeconomic stability in attracting foreign investment. Additionally, inflation and unemployment emerge as significant determinants of FDI trends across different regions and periods. The findings highlight the necessity for policymakers to establish strong institutional frameworks and improve macroeconomic stability to alleviate the negative impacts of tax evasion on foreign direct investment (FDI). Enhancing regulatory mechanisms and promoting economic resilience can boost investment attractiveness and encourage sustainable economic growth. This study adds to the literature by providing a comparative analysis of tax evasion’s effect on FDI in two significant emerging economies. It delivers empirical insights into the intricate relationship between tax policy, economic stability, and foreign investment, guiding strategies for policymakers in emerging markets.