The effect of foreign direct investment on tax revenue in Uganda (1990-2021)

Abstract

The objective of this research paper is to analyze the effect of foreign direct investment (FDI) on tax revenue in Uganda. Inward foreign direct investment, outward foreign direct investment, Gross Domestic Product, manufacturing sector, service sector, trade openness and inflation are selected as the independent variables. Tax revenue is chosen as the dependent variable. The annual time series data from 1990-2021 was analyzed using the Autoregressive Distributed Lag (ARDL) model. The research finds that in the long run inward foreign direct investment, Gross Domestic Product, manufacturing sector and trade openness are positive and statistically significant to Tax revenue while outward foreign direct investment is negative and statistically significant to Tax revenue. The study recommends that government should implement measures such as inviting FDI through clear and friendly rules and regulations that do not degrade the host country's major products, selecting FDI that does not impair domestic industry development owing to monopolies, and developing an enforceable policy on knowledge transfer.