The impact of location tax incentives on the growth of rural economy: evidence from Ghana

Abstract

Over the last two decades, location tax incentives programs serving as a motivating force have been progressively well known as activities to draw in and/or hold foreign direct investments (FDIs) in economically blighted areas. The study examined the impact of location tax incentives on the growth of the rural economy of Ghana from the period of 1994 to 2018. The data were sourced from Ghana Investment Promotion, UNCTAD, and the World Tax Database. Using ARDL Cointegration and Error Correction Models were estimated to examine the static and dynamic long-run effects as well as the short-run dynamics of the system and the speed of adjustment to the long-run equilibrium. However, FDI is skewed towards the Greater Accra region, Ashanti region, Central region, and Eastern and Western regions notwithstanding the location tax incentives the government has been given since the 1990s. The study shows that there is a positive and statistically significant effect of tax incentives on employment creation and rural development in the long run. It revealed that trade openness and market size have a significant effect on employment creation and rural development. It emerged that there is no correlation between location tax incentives and the regional distribution of FDI in Ghana. It has become a well-established fact that adequate tax holidays are beneficial to businesses and encourage them to make investment decisions. It is therefore recommended that a more extensive mindfulness crusade through workshops, courses, and advertisements is necessary to empower the investors about the accessible business opportunities.