Impacts of double tax treaties on FDI in lower-middle-income and upper-middle-income countries: Recommendations for Vietnam

Type of the article: Research Article

Abstract
This study examines the relevance of double taxation treaties (DTTs) in attracting foreign direct investment (FDI), with a focus on how their effects change across lower-middle-income and upper-middle-income countries. As global capital mobility intensifies, many developing economies have expanded their tax treaty networks to enhance investment appeal. The study aims to evaluate whether such expansions effectively increase FDI inflows and how the results vary by income group. Using a balanced panel dataset of 42 developing economies from 2004 to 2023, the empirical analysis applies fixed effects regression models. FDI inflows measured as a percentage of GDP in current US dollars serve as the dependent variable, with control variables capturing both domestic institutional quality and external macroeconomic conditions. The results show that, on average, signing additional DTTs raises FDI inflows by 0.26% in upper-middle-income economies, a relationship statistically significant at the 5% level. In contrast, the effect in lower-middle-income countries is statistically insignificant and occasionally negative, with average changes in FDI below 1%. This divergence suggests that strong governance, transparent legal systems, and stable macroeconomic environments are crucial preconditions for converting tax treaty networks into tangible investment gains. The findings conclude that while DTTs can facilitate cross-border investment, their effectiveness depends largely on domestic institutional capacity, implying that treaty expansion without complementary structural reforms yields limited benefits.