Taxation and Foreign Direct Investment in Developing Economies: A Study of India and Bangladesh

This research proposal aims to study the impact of taxation on foreign direct investment in developing economies, specifically India and Bangladesh. The study will analyze the tax-GDP ratio, FDI inflow, and other relevant data to determine the relationship between taxation and FDI decisions. The research objectives include identifying the relevant dataset, evaluating the dataset, and analyzing the data. The study will also explore how FDI influences GDP and other associated economic parameters of these developing economies.

Running head: RESEARCH PROPOSAL
Research Proposal
Name of the Student:
Name of the University:
Authors Note:

2RESEARCH PROPOSAL
Table of Contents
Research Question......................................................................................................................3
Hypothesis..................................................................................................................................3
Background and Academic Context...........................................................................................3
Research topic........................................................................................................................3
Research Objectives...................................................................................................................4
Research Strategy.......................................................................................................................4
Specify period of study..........................................................................................................5
Identifying the relevant dataset..............................................................................................5
Evaluating the dataset............................................................................................................5
Data collection methods.........................................................................................................6
Data Analysis.........................................................................................................................6
Key Academic Ideas..............................................................................................................6
How does this research relate to existing literature?..................................................................7
Analysis of the results:...........................................................................................................9
Conclusion..............................................................................................................................9
Research Ethics..........................................................................................................................9
Confidentiality and Consent:..................................................................................................9
Evaluation of data:...............................................................................................................10
Access to data:......................................................................................................................10
References................................................................................................................................11

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Research Question
Does taxation influence the foreign direct investment in developing economies? (India and
Bangladesh)
Hypothesis
The hypothesis formed based on literature review is as follows:
• There is no significant impact of taxation on FDI decisions in developing countries.
For simplicity of analysis the taxes considered are consumption tax, income tax, import tariff,
business taxes (like property taxes, etc). The idea here is to study the impact of all these
variables on FDI in respective countries.
Further scope of this research will be to explore how FDI influences GDP and other
associated economic parameters of these developing economies. This will give an idea on
how the tax policy changes can affect the overall growth of economies.
Taxes on income (both wages and profit) can affect return on work effort. Labour supply
could be inelastic and therefore incidence of tax will fall on workers in short run. In long run,
supply elasticity is higher. When wage costs are high, companies will be less likely to invest
in these economies. This is because with higher incidence of taxes companies will be left
with lower profit and burden of higher overhead expenses. Again, with higher import tariff
other economies will be keener to produce the good in the target economy itself in order to
capture market share.
Background and Academic Context
Research topic
Governments of both developed and developing countries are always eager to bring in
foreign direct investment in their respective countries. The need for FDI is of more
importance in case of developing countries as they most often suffer from capital deficiency
in their economy. FDI not only brings in capital but also technological progress, better
managerial techniques and blueprints in the developing countries. FDI investment generates
employment and income together with development of market, establishment of economic

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institutions in these counties whose spill over effect spreads across the economy in the form
of positive externality (Jones and Wren 2016).
However, FDI in any country is subject to several conditions. The carriers of FDI are
multinational corporations (MNC) who will invest only when they foresee encouraging return
from the same. For this they take a few factors into their consideration to assess the
investment environment of the country with investment potential. One such factor is taxation
system of the country. How the government taxes the business is a factor that is believed to
be impacting the investment decision (Said and Marimuthu 2012).
Knowing the underlying psychology of the MNCs governments of developing countries cut
tax rate on investment and offer other tax benefits to these companies to lure them. However,
most developing countries likely to have a weak and cumbersome tax design wrapped in
stringent and non-transparent administrative rules (Molle 2017). These make tax compliance
a time consuming and inconvenient task. MNCs, therefore, find such tax incentives
unattractive and do not consider it as a major factor while deciding on FDI in a developing
country (Morisset and Pirnia n.d).
Research Objectives
The question that this research seeks to answer is: “How taxation influences the FDI
decisions in India and Bangladesh?”. The reason behind choosing Bangladesh along with
India are manifolds. First, both are democratic countries. Second, they are neighbours, and
hence, a comparison can be made easily with ample availability of data and primary research.
Third, India is a large country while Bangladesh is a small country in terms GDP, population,
foreign trade and foreign investment. It would be interesting to study whether there is any
effect of taxation on a large country vis-à-vis a small country.
Research Strategy
The study requires secondary data analysis. However, quantitative and qualitative analysis
may be used. A secondary study will help gather data on various developing countries’ FDI
inflow, tax-GDP ratio, HDI rank needed to ascertain the level of development of the country
(Johnston, 2014). Moreover, there is no other option but to use secondary data for a study that
involves collection and comparison of data across countries. The specific objectives behind
this research are:

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Specify period of study
For the purpose of conducting the research a period of last ten years is being taken up that
is the time period from 2005-2015. The reason for the same is that the period for which the
research is to be conducted must be sufficient enough to accommodate the changes that come
with the change in the leadership of the country, the time that is taken up by the reforms to
actually yield quantifiable results and the time required for the purpose of reliably measuring
the same (Deresky 2017). If the period is taken too long then the weightage of the irrelevant
past actions and the decisions of the government of the country will be reflected and if the
period is too small the substantial changes taken place in the country won’t be reflected
properly.
Identifying the relevant dataset
For the purpose of identification of the relevant dataset it is necessary to track down the latest
changes that have occurred in the economy of the countries chosen for the research. The
reason for the same is that the main purpose of the research is to not only establish the current
situation existing in the country but also the implications of the various decisions taken up by
the government in the last few years that have significantly impacted the economy of the
country. In this scenario for India, the data has been taken from 2005-2015 from
“DIRECT AND INDIRECT TAXES - Statistical Year Book India 2017” and for
checking the trend of taxation of India and Bangladesh; it has been taken from “World
bank Data” under the heads of Percentage of Tax GDP and FDI.
Also, the data taken will help in understanding the execution of principles and reforms taken
in the countries over the years (Low 2016).
Evaluating the dataset
For the purpose of the evaluation of the data set that is being chosen and the results that are
being obtained an effort is being made to ensure that the questions and the parameters of the
research are kept objective in n nature. the reason for that is that if the questions are kept
objective with further clarifications being required on the part of the body to whom the
question are being asked, then the analysis carried out based upon it will be very accurate and
objective in nature (Deresky 2017). The reason for that is that if the scope of subjectivity is
eradicated all the relevant points that are influencing the economy and the Foreign Direct
Investment within the country will come to light.

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Data collection methods
For the purpose of collection of the data an effort will be made towards ensuring that the right
method is being used up for the same purpose. The reason for this is that in case the
method that would be used is secondary data collection method because to acknowledge
the taxation and FDI environment, it is important to address years based on which
changes had led to implications.
For the purpose of conducting the following research the method of primary method of
data collection will also be beneficial as the primary data would be done based on
respondents of taxation official personnel that can give us an overview of on a macro
level.
Data Analysis
Based on the results that are obtained from the interview and the analysis of data using
secondary data sets over the years that will lead to analysis of effective and efficient approach
adopted for the purpose of ensuring that the results that have been obtained from the
questionnaire are utilised for the purpose effective communication of the results.
Key Academic Ideas.
Taxation: A system where the government collects revenue from business and household for
making its expenditure is called taxation. The governments can encourage or discourage
economic decisions by altering levels of taxes.
The taxation system of developing country like India is broadly classified in to Direct Tax
and Indirect Tax. Direct taxes are those whose burden falls directly on the entity being taxed.
They include Income tax, Corporation tax, Capital gain tax, Wealth tax. Indirect taxes are
those which are paid by someone, but its burden can be partially or wholly shifted to other
person through business transactions. They include Excise duties, Sales tax, Goods and
Services tax (Chakraborty 2016). In 2013-14 the tax-GDP ratio of India stood at 17.4 percent.
The same ratio in sub-Saharan Africa in 2010 was 20 per cent (EPS 2013).
Taxes impact economic growth in developing countries in many ways. Studies by Aleena
(2014) to determine the effect of tax incentives on economic growth of Kenya showed that
there was a negative relation between GDP growth rate and tax incentives. Another study in
2016 by Eugene Abigail which examined the impact of tax incentives on economic growth of
Nigeria, demonstrated that taxes have a significant effect on Nigeria's economic growth.

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Especially it was the indirect taxes that had the robust positive effect on the economic growth
of the country while the direct tax had weak impact on growth (Thaçi 2018).
Foreign Direct Investment (FDI): Investment by one country into another mostly through
private agents like companies, individuals instead of government is known as foreign direct
investment or FDI. Foreign direct investment is the source of employment, growth and
income along with exposure to foreign capital, technological progress, improved managerial
practices.
India post 1991 pursued a policy of liberalization and welcomed foreign direct investments.
These investments have been key to drive growth economic activities through technology
transfer, creation of employment, and improved access to managerial expertise (Pradhan
2017). The exposure to global capital, product markets and distribution network restructured
the Indian market. FDI in India has helped the country to achieve some degree of financial
stability, growth and development. Even in the wake of financial crisis 2008 and its
subsequent global recession India was able to retain its FDIs and attracted more capital flow
compared to many developed countries (Marimuthu 2012).
Developing Countries: Development is a concept which is difficult to define. There are no
universally accepted criteria for classifying countries according to their level of development.
International agencies like UNDP, IMF and World Bank use their separate criteria to make
distinctions and group countries according to their level of prosperity (Aharoni 2015). The
term “Developing Countries” is used mostly by UNDP to indicate those countries which are
below the 75 percentiles of the Human Development Index distribution. The world Bank
defines developing countries as those countries which have per capita income level of $4, 035
or less (A4ID 2018). The primary characteristics of developing nations include low level of
industrialization together with low level of income, lower life expectancy, lower educational
attainment, and high rates of fertility. Most of the countries in Africa, Asia, South America,
Central Europe, and East Europe exhibit these features and hence are considered as
developing.
How does this research relate to existing literature?
Studies have investigated the role of foreign direct investment in growth of developing
countries. It has been found that FDI is not driven by a single factor but is a function of
multiple factors including market size, market growth, human capital, trade openness,

8RESEARCH PROPOSAL
taxation, physical infrastructure (San, Cheng and Heng 2012). In their study San, Cheng and
Heng (2012) delved deep into the relationship between corporate tax and US outward FDI in
developing countries. They found that there exists a negative relation between the two in host
developing countries.
OECD (2008) report on effects of tax on FDI stated that FDI falls by 3.7% with a 1
percentage point increase in the tax rate on FDI. However, other studies reflect decrease in
the range of 0% to 5%. This variation is partly due to differences between the industries and
the examined countries, or the time periods considered (OECD 2008). In the same report it
has been further mentioned that some studies have shown increasing sensitivity of FDI
against taxation. This is due to the enhanced mobility of capital resulting from removal of
non-tax FDI barriers. In his discussion (Margalioth, (n.d)) emphasised on the negative impact
that taxation has in attracting FDI. In fact, international institutions like World Bank, OECD,
IMF consider it a “Bad policy” to use tax incentives for luring FDI. The strongest argument
against the tax incentives are that it distorts behaviour and brings in inefficiency and they are
not effective rather are harmful and have very little impact of FDI decision (Penrose 2017).
A study by (Economou et.al, 2016) revealed that in developing countries the taxation does
not play a significant role in decision drawing FDI in those counties. The determining factors
included market size, labour cost, and institutional variables. (Maria et al., 2017) in their
book titled Corporate tax incentives and FDI in developing countries elaborate the reason
behind insignificant impact of taxation on FDI inflow in developing countries. They are of
the view that in most developing countries the tax design is clumsy, weak, lacks
transparency, and is full of administratively cumbersome paraphernalia. These make the tax
incentive less attractive and inefficient.
Previous researches focused on capital income taxes mainly. Also, they did not exclusively
consider developing economies. So, in this paper the idea is to explore what kind of tax
policies developing economies should undertake in order to boost their growth through FDI.
These developing economies depend a lot on inflow of foreign investments for their all-round
economic growth (Paramati et al. 2015). Therefore, the paper will throw light on the
possibilities of adjustment in taxes and tariffs in order to promote these foreign investments.
In addition to that an effort will be given to ensure that the relevant results that are obtained
from the analysis and the research are objective in nature. The reason for that is that the
usefulness of the information that is received in a subjective manner is very less compared to

9RESEARCH PROPOSAL
the usefulness of the information that is objective in nature (Kim et al. 2015). If the
objectivity of the information that is gathered is being focussed upon the implications of the
various decisions taken up by the government in respect of the tax deductions given out to the
companies. The importance of the study of the result is immense, the reason being that if the
reasons or the factors that are affecting the FDI within the country are found out it will enable
the government of the countries to form the decisions and undertaking steps that will
guarantee the increase in the flow of the FDI within the country (Sinclair-Maragh and Gursoy
2015). it is seen that it is not only the matter of the deductions that are being given out by the
company but also the extent of the compliance procedures that are to be followed by the
entity to ensure that the required actions and the decisions are being taken up by them.
Analysis of the results:
It is seen that both the countries are agreeing that the complexities that are present in the
system taxation within the country are a significant reason by which the FDI of the country is
affected. India is more agreeable on the fact that the deductions that are being given to the
companies affect the FDI in a significant way. Bangladesh on the other hand is of the belief
that the deductions that are being given to the companies do not influence the FDI in a
significant manner.
Conclusion
It can be concluded that the Bangladesh is of the view that the impact of the deductions on
the FDI of the country is not so significant. On the other hand India is of the opinion that the
deductions given out to the companies play a huge rule in ensuring that the FDI is coming
into the country in adequate amounts.
Research Ethics
Confidentiality and Consent:
Since secondary research method involves existing research data to find an answer to the
research question, ethical concerns about them include data confidentiality and security
(Triparty, 2013). The data that will be used for this research are freely available in the
internet, books or other public forums. That is why their use for further analysis is implied.

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There is no need to take usage permission separately. However, the ownership of the original
data will be acknowledged (Grinder 2009).
Evaluation of data:
Another point that will be taken care of is the evaluation of the data. Since the data used for
this study was not collected to answer this research question, its adequacy and relevance must
be ascertained. This will be done by scrutinizing the methodology of data collection,
accuracy of the data, data collection period, purpose of data collection and the content of the
data.
Access to data:
The access of the data will be restricted to ensure that there is no unauthorized use of the
data, accidental loss or destruction.

11RESEARCH PROPOSAL
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