Trade Liberalization, Public Governance, Foreign Direct Investment and Tax Revenue - Evidence from East Africa Community Member Countries

Abstract

Tax revenue is a fundamental source of government financing and plays an important role in supporting economic development, provision of public services and fiscal sustainability. However, East African Community (EAC) member countries continue to experience challenges in mobilizing adequate domestic tax revenue amid increasing regional economic integration, trade liberalization and competition for foreign direct investment. This study examined the relationship between trade liberalization, public governance and foreign direct investment on tax revenue of EAC member countries. Trade liberalization was operationalized using trade openness ratio, public governance using the Corruption Perception Index, foreign direct investment using net foreign direct investment flows, and tax revenue using the tax-to-GDP ratio. The study adopted a longitudinal panel research design covering EAC member countries over the period 2000 to 2023. Panel data was employed to establish the joint relationships between the explanatory variables and tax revenue. The findings revealed a statistically significant relationship between trade liberalization, public governance, foreign direct investment and tax revenue. The findings demonstrated that economic openness, investment flows and institutional quality are important dimensions of domestic tax revenue mobilization in the EAC. As a result, this study recommended strengthening domestic tax administration alongside trade liberalization, improving governance and accountability, and developing investment policies that encourage productive FDI while safeguarding the domestic tax base as strategies for enhancing tax revenue of EAC affiliated countries.

Keywords:       Trade liberalization, public governance, foreign direct investment, tax revenue, EAC.