A timeseries analysis on the relationship between foreign direct investments and tax revenue in Uganda

Abstract

The general objective of the study was to establish the relationship between FDI and Tax revenue in Uganda. All findings in the study were based on secondary data obtained from the World Bank development indicators data portal and Uganda revenue authority, which is an authentic source of survey data. The data before analysis was transformed to local currencies to make it conform to a layman’s understanding to everyone. Line graphs were used to assess the trend of the variables and they were found to exhibit increasing patterns. The unit root test was carried out to confirm whether the series were stationary, it was found that the variables had a unit root (non-stationary) and when differenced at first differencing the variables become stationary. A regression analysis was carried out to determine the impact of foreign direct investment onto tax revenue in Uganda and it is noted that there is a positive effect of FDI inflows on tax revenue. Correlation was carried out to examine the relationship between FDI and tax revenue and it was found that there existed a strong positive correlation between the variables. The study recommended that Uganda should encourage more foreign direct investment which will attract more foreign direct investment that could lead to increase in tax revenue for the country. Therefore, the government could consider implementing policies that promote and encourage more foreign investment in the country. Another recommendation was Improving the business environment, a favorable business environment is essential in attracting foreign investment. The government could work towards creating a business-friendly environment that includes stable economic conditions, an efficient streamlined business regulations and this should create an enabling environment for investors and nationals in terms of policies such that tax incentives to increases investment and as a result GDP will increase significantly leading to increase in tax revenue and improving the living standards of the nationals.