Trade Globalization, Overseas Investment, and Tax Revenue Growth in Sub-Saharan Africa

2.1 Conceptual Definitions

Dragusha et al. (2023) define trade liberalization as a multidimensional concept that involves the establishment of multiple relationships and interconnectedness between nations and groups that comprise the contemporary world, commonly referred to as the international community. According to Dragusha et al. (2023), to liberalize trade, tariffs, quotas, and non-tariff barriers must be decreased or removed. Stronger export industries can profit from greater investment in resources, usage of capacity, economies of scale, and advances in technology as a result of international market competitiveness. Nevertheless, importation has an important role in fuelling the growth of the economy. Imports can give local companies the opportunity to use foreign technology and intermediary supplies, leading to long-term growth of the economy (Tafirenyika et al., 2023).

Furthermore, Lashkaripour (2020) posited that the substitution of a portion of the domestic tax revenue with import duties can be advantageous. This is due to the fact that in cases where trade elasticity is low and import tariffs prove to be more efficient in revenue generation, the burden falls mainly on domestic consumers. The trade-off between efficacy and efficiency highlights that even an uncooperative government could replace a small part of its internal tax income with import duties in a beneficial manner. Conversely, the effectiveness of export duties varies depending on the trade elasticities at the industry level (Lashkaripour, 2020).

2.2 Theoretical Underpinnings of the Study

The two theories underpinning this work include the Reimbursement Theory and the Neoclassical Growth Theory.

2.3 Empirical Studies

Edo (2024) demonstrated that the direct impact of trade openness and domestic public debt yielded a notably positive outcome. Furthermore, the results indicated that the combined impact of commercial globalization and domestic public debt was markedly advantageous, whereas the combined impact of trade openness and foreign public debt was moderately favourable. The research confirmed that trade openness and national debt acted as complementary catalysts for economic advancement in sub-Saharan African countries. Singh (2024) conducted an assessment of the enduring relationship between imports, exports, FDI, and economic growth in the context of India’s economic transformation spanning the period from 1991 to 2019. Through the utilization of a co-integration model, it was unveiled that there exists a sustained correlation between GDP per capita, exports, imports, and FDI. The outcomes of the study indicated that exports played a pivotal role in positively influencing GDP per capita, whereas imports and FDI demonstrated a negative influence. Importantly, imports exhibited a more substantial detrimental impact on GDP per capita compared to FDI. Additionally, the vector error correction model unveiled the presence of long-term causality from GDP per capita, exports, and imports to FDI, along with short-term causality from GDP per capita to FDI, imports to FDI, and GDP per capita to exports.

Bajraktari et al. (2023) examined the impact of global trading openness on revenue growth in Western Balkan nations from 2000 to 2021 by employing Fraser Institute yearly statistics. The research revealed that commerce worldwide openness and economic expansion were positively related. Dragusha et al. (2023) examined the link between trade liberalization, international trade, and economic expansion in Albania, utilizing yearly business growth data from 1994 to 2019. The research findings for the Albanian instance indicated that commerce liberalization had an advantageous impact on economic expansion, exports of goods, and imports from abroad. Minh and Trinh (2023) investigated the link between FDI inflows, openness to commerce, and the impact of FDI on economic development in 60 emerging market nations between 1995 and 2019. The research undertaken proved that FDI exerted a beneficial influence on the growth of the economy in emerging economies. The investigation also discovered a substantial borderline of inflows of FDI compared to GDP, which modifies the influence of inbound FDI on the expansion of the GDP. Considering the importance of trade openness, a considerable ceiling was discovered, indicating the host nations’ absorption potential.

Vidriza et al. (2023) offered authorities with a synopsis of multiple elements that influence GDP growth for G20 members, as well as approaches to sustaining financial success in the face of the implications of liberalization, globalization, and unrestricted commerce for G20 participating nations from 2016 to 2020. Apart from commerce, the findings revealed that specifically chosen macroeconomic variables such as FDI, expenditures by the government, and price increases had a substantial negative influence on the economy’s expansion. Tafirenyika et al. (2023) used the autoregressive distributed lag (ARDL) co-integration approach to investigate the effect of exports, imports, and openness to commerce on Namibian economic development. The study found a significant negative correlation between importation and economic expansion, whereas exports and freedom of trade had both beneficial and significant associations. The study further indicated that short- term economic development was stimulated by exports, imports, and freedom of trade.

Mehta and Mallikarjun (2023) studied how budgetary shortfalls, the currency exchange rate, and openness to trading affect current account deficits. According to the study, currency rate and trade permeability have a considerable impact on the current account imbalance. The study found that liberal trade policies that benefit domestic sectors and expansive fiscal measures contribute to a greater current account shortfall. Nisha and Madhvi (2023) investigated the impact of capital investment creation on greenhouse gas emissions throughout two separate phases of India’s growing economy. India liberalized its economic system through trade liberalization in 1991, resulting in two separate phases of restricted and unrestricted commerce. The statistical information on the economy from 1971 to 2021 is separated into two distinct sections: prior to (1971–1990) and after (1991–2021) liberalization. Fund creation was measured using the amount of gross fixed capital created, while the ecological effect was represented by the release of carbon dioxide. Findings showed that gross fixed capital created had no substantial association with carbon emissions prior to liberalization, but had a large, beneficial influence after liberalization.

Onifade et al. (2022) investigated the implications of trade liberalization on the financial health of a few chosen Middle Eastern and North African nations. The statistical evidence confirmed that local expenditure and workforce composition had a substantial advantageous effect on the economic expansion in these nations, but openness to trading turned out to have an adverse effect on financial performance within the time frame of the study. Siddika and Ahmad (2022) conducted a cross-country analysis on trade facilitation and the rise of the economy from 1995 to 2010.

Leveraging on an innovative panel methodology and the Sachs-Warner freedom measure, the research concluded that trade liberalization exerted a strong positive influence on economic productivity. According to Dauti and Elezi’s (2022) research, freedom of trade, price rises, Money invested and production gaps significantly impact the financial situation in Central and Eastern Europe and the Western Balkans.

Previous study explored the relationship between the actual pace of growth and the percentage of imported and exported goods in GDP, using Serbia as a case in point. The study used VAR technique and spanned 2000–2019. Commercial flexibility, especially geared towards export regulations, leads to a long time overall economic recovery. Conversely, the percentage of importation in the nation’s gross domestic product maintained an adverse relationship with GDP. Udeagha and Ngepah (2021) investigated the disproportionate impact of trade liberalization on economic expansion in South Africa using a nonlinear ARDL model. The findings revealed that commerce freedom had both immediate and long-term adverse implications for the economy’s expansion.

Oloyede et al. (2021) presented a positive yet statistically insignificant link between economic growth and trade openness within the integrated models of Economic Community of West African States (ECOWAS) and Southern African Development Community, as well as within the distinct Regional Economic Communities. Malefane and Odhiambo (2021) used an ARDL bound analysis to investigate the changing effect of openness to commerce on Lesotho's GDP growth. The study used four measures of trade openness, including three trade-based proxies and a trade openness index. This study’s empirical findings revealed that global trade liberalization had no substantial influence on GDP growth in the immediate or distant future, regardless of the indicator employed. Wani and Mir (2021) looked into the relationship between globalization, encompassing overseas investment, exports, imports, and foreign remittances, and economic expansion in India. According to the report, imports and FDI boosted India’s growing economy. On the other hand, exports and overseas remittances exhibited a negative and substantial association with GDP growth.

Popović et al. (2020) used a panel model to identify explanatory variables for economic growth in Balkan nations. Their analysis concluded that only the influence of trade liberalization is statistically noteworthy and in an advantageous perspective. Raghutla (2020) studied the influence of freedom of trade on economic development in five developing market nations, using data from 1993 to 2016. Utilizing the panel calculation approaches statistical findings prove the long-term correlation among trade liberalization, growth in the economy, financial expansion, rising prices, workforce, and technological advances, while long-run flexibility shows that openness to trade had a major beneficial effect on the growth of the economy. Additionally, the variety of panel non-causation tests revealed a two-way causal relationship between revenue growth and price hikes, as well as a causality that is unidirectional that flows from commercial advancement to international accessibility and industrial progress to financial stability in the near term.

Krajišnik et al. (2020) studied the influence of export patterns on growth in the economy of Bosnia and Herzegovina. The study identified a poor arrangement for international trade activity in Bosnia and Herzegovina, highlighting the need to enhance export success in order to lower the country’s foreign trade imbalance. The study found that exports were essential for Bosnia and Herzegovina’s prosperity. Osabuohien et al. (2019) demonstrated that the presence of trade complementarity had a remarkable and positive impact on the levels of bilateral trade specifically limited to the sub-regional area. Popović et al. (2019) found a beneficial correlation between overall commerce and increase in GDP in the sovereign nation of Srpska. Researchers also found an unfavourable link between trade imbalances and Growth.

Gnangnon (2017) investigated the effects of international trade policy liberalization on nations’ levels of economic growth, as measured by real per capita income. The study is especially pertinent in light of rising criticism against trade with other nations, which might promote home chauvinism and impede commerce worldwide freedom. The research was carried out using a panel data set of 155 nations across non-overlapping 4-year sub-periods spanning 1995–2014. The evidence collected provided significant backing for the hypothesis that global trade openness boosts the development of the economy.

Keho (2017) investigated the influence of trade liberalization on economic development in Cote d’Ivoire from 1965 to 2014 using a framework consisting of multiple variables with capital accumulation, labour, and commerce liberalism as the predictors. The findings indicated that openness to trading had an auspicious impact on economic growth in both the short and long term.

The study also found a beneficial and significant complementary association between trade liberalization and capital development in boosting economic expansion. Mireku et al. (2017) examined the influence of openness to commerce on Ghana’s GDP variability from 1970 to 2013. Results revealed that increases in freedom of trade had a beneficial impact on both long-term as well as short-term economic expansion fluctuations. Instability in local lending to the business community, as well as shocks from economic liberalization and openness to finance, all resulted in rapid economic unpredictability. Olayiwola et al. (2015) found within the ECOWAS that intra-regional imports were higher than intra-regional exports, with maximum values of 20 and 15%, respectively, from 1999 to 2009.

3.1 Specification of Vector Error Correction Models

The conventional VECM showing both the long- and short-run relationship is specified as shown below:

Here:

1. ECT t − 1 is the lagged OLS residual obtained from the long-run co-integrating equation:

It is expressed as ECT t − 1 = [ Y t − 1 − y 1 X t − 1 − ξ 1 R t − 1 ] , the co-integrating equation. The ECT explains that the previous period’s deviation from LR equilibrium (which is the error) influences short-run (SR) movement in the dependent variable.

2. λ is the coefficient of the ECT and the speed of adjustment. It measures the speed at which y (dependent variable) returns to equilibrium after changes in X and R.

For the purpose of this study, the following VECM applies:

where Ln is the natural log; t is the time; k is the maximum lag; β is the coefficients; Ø is the difference in parameters; Δ is the difference operators; K – 1 is the lag length reduced by 1; λ is the speed of adjustment parameter with a negative sign; β _i , ϕ _j , φ _m are short-run kinetic coefficients of model modification and long-term stabilization; ECT ^t−1 is the error correction term represents the lagged value of the residuals produced from the reliant variable’s co-integrating regression with the regression factors. Long-run details are acquired from the long-run co-integrating interaction. μ ₁ t are residuals (stochastic error terms frequently termed impulses, or innovations or shocks) (Table 1).

4.1 Diagnostic Tests

The diagnostic tests in Tables 7 and 8 show that our model has no correlation between variables or unevenness because the p-values are greater than 0.05.

5.1 Conclusion

The research looks at how trade globalization, investments from abroad, exports, and imports affect sub-Saharan Africa’s tax income growth. We used data from 1990 to 2022 and employed VECM since all of the parameters used in this analysis were shown to be stationary at the first difference and had long-run co-integration (Rehal, 2022). The results reveal that the long-run divergence in achieving the intended tax revenue increase through the different factors analysed would return to equilibrium at an optimistic rate of adjustment of 8.5%. The findings further reveal that a proportional increase or decrease in LNTRG leads to a 13.7% fall in LNTXR in the short term. In the near term, a shift in LNIMP corresponds to a 23.9% increase in LNTXR, whereas LNGDP corresponds to a 41.3% decrease in LNTXR. A percentage change in LNOSI correlates with a 7.7% increase in LNTXR, whereas EXP correlates with a 4.6 increase in LNTXR in the near term.

Based on the effect analysis, no parameter assessed in this study has a substantial impact on tax revenue increase. Trade openness appears to have a negative impact on economic growth and exports in Sub-Saharan Africa, whereas import and tax revenue growth have an adverse effect on overseas investment in the short run, but tax revenue growth has a positive influence on FDI in the long run. These findings raise a number of policy concerns, including the examination of trade policies for imports and exports in sub-Saharan Africa.

5.2 Recommendation

It is critical that the government implement measures that increase exports while reducing imports in the region. Too much importation will result in an overdependence on foreign products, adverse balance of payment, and reduction of FDI in local industries in the region since the products will not receive adequate patronage from the people who have become too used to foreign goods and services. It is also critical for governments in Sub-Saharan Africa to reconsider tax policies that hamper the entrance of foreign investment. This is vital at this moment because of the longstanding advantages of FDI to growing countries; as a consequence, it is important to formulate tax policies that would attract these investments for the benefit of the sub-Saharan African countries. It is also necessary to evaluate bilateral trade policies affecting Sub-Saharan African nations to ensure that they promote regional economic advancement and increase exports of local products.