The Role of Tax Incentives and Wage Dynamics in Shaping Foreign Direct Investment: A Cambodian Perspective (2009-2023)

Abstract

This study examines the impact of tax incentives—specifically those related to Tax on Income (ToI) exemptions—and minimum wage dynamics on foreign direct investment (FDI) inflows in Cambodia, with a focus on the role of Qualified Investment Projects (QIPs). Using descriptive statistics, one-way ANOVA, Tukey’s post hoc test, and multiple regression analysis, the research reveals significant variability in FDI inflows. The results strongly support Hypothesis 1, confirming that tax exemptions (5%, 10%, or 15%) are positively associated with higher FDI, although benefits diminish beyond a 5% exemption. Contrary to Hypothesis 2, a strong positive correlation (r = 0.950, p < 0.001) was found between the minimum wage and FDI, suggesting that rising wages may reflect economic stability and labor quality, thereby encouraging investment. Regression analysis (R² = 0.931, p < 0.001) reveals that both tax exemptions and minimum wage are positively related to FDI; however, only minimum wage demonstrates individual statistical significance (B = 11.586, p = 0.002). These findings offer partial support for Hypothesis 3, indicating that while tax incentives are relevant, wage levels play a more influential role in attracting FDI. The study concludes that a combination of higher minimum wages and generous tax exemptions yields the highest predicted FDI inflows, emphasizing the need for balanced economic policy.