Abstract:

Researchers and policymakers are debating the role of fiscal or tax incentives play in attracting international financial inflows to Emerging Market Economies (EMEs). While some consider fiscal incentive as an essential driver of foreign investments, others found otherwise. The problem however is that most of the studies carried out in this area had focused on Foreign Direct Investment(FDI) thereby ignoring Foreign Portfolio Investments(FPI) which constitute a significant share of total capital inflows to these economies. This is therefore an attempt to investigate the effect of fiscal incentives on each component of foreign investments as well as their role in moderating the contribution of these inflows to the economic growth of the selected EMEs. Country-level panel data from nine emerging markets selected from three regions; Africa, Asia, and Latin America, and the Caribbean (LAC) was used for the study. The Panel Corrected Error method was utilized on the data covering 1989 to 2018. The study found that both FDI and FPI had a positive effect on the economic growth of the EMEs.However, the interaction of each component with the fiscal incentive resulted in a negative coefficient signifying that fiscal incentive plays a key role in moderating the benefits accruable from inflows of investments in emerging markets. In other words, poor fiscal policy design and implementation can erode the anticipated benefits of foreign inflows. The study recommends that policymakers must strive to maximize the expected benefits accruable from each component of foreign investments through a holistic review of existing fiscal policies and formulation of new ones targeting more beneficial inflows.