The 'Bidding War' to Attract Foreign Direct Investment: The Need for a Global Solution

Abstract

It is a widely accepted practice by governments to grant tax incentives to entice and retain foreign direct investment (FDI). Since many countries seek to attract FDI, an "incentive competition" or "bidding war" between countries takes place, whereby some countries attempt to offer foreign in-vestors the most favorable inducements. According to my analysis, there is a need for a viable and robust global regime to constrain FDI competition. Global governance of FDI competition could serve as a tool to constrain the decision-making discretion of national governments and make them less vulnerable to lobbying by special interest groups. I argue that global governance in this field functions as a "Political Constraint Tool" similar to World Trade Organization (WTO) tariff constraints to help avoid excessive responsiveness to lobbying by interest groups. I further argue that the global regime should follow a "hard law," rather than a "soft law," approach, and that in general there should be no distinction between developed and developing countries.

Keywords: foreign direct investment, FDI competition, Global governance