The impact of Two-way Direct Investment on Tax Revenue: An Empirical Analysis Based on Jiangsu Province

Abstract

Two-way direct investment is an important part of the open economic system. The financial   pressure causes local governments to generate internal motivation to absorb more tax revenue. The research on the relationship between them is helpful for us to have a deeper understanding of the local government behavior in the new opening up pattern. This paper uses GMM estimation and panel threshold model to discuss the tax effect of two-way direct investment based on the municipal data of 13 cities in Jiangsu Province from 2010 to 2020. The results show that: first, increasing two-way direct investment can significantly increase local government tax revenue, and this effect is more significant in the region with higher degree of foreign direct investment and outward foreign direct investment. Second, with FDI as the threshold variable, the optimization of industrial structure will increase the tax revenue of the whole province and the central and northern regions of Jiangsu while inhibiting the tax revenue of southern Jiangsu. The investment in fixed assets will reduce the tax revenue in northern Jiangsu and help increase the tax revenue in the whole province and southern Jiangsu. Third, when OFDI is the threshold variable, improving economic development level, optimizing industrial structure, increasing fixed asset investment and per capita wage can promote the growth of tax revenue. Therefore, in today's free and open market economy, Jiangsu Provincial government should continue to formulate and improve relevant policies, ctively introduce foreign direct investment and encourage outward foreign direct investment.