Tax Incentives to Entice Foreign Direct Investment: Should There Be a Distinction between Developed Countries and Developing Countries?
28 Pages Posted: 20 May 2009
Date Written: May 12, 2009
Countries often provide investment incentives with the hope of attracting and retaining foreign investors. Generally, governments employ investment incentives to induce investors to establish a presence, to expand an existing business or not to relocate elsewhere. Countries usually raise various reasons to justify the granting of investment incentives, such as the need to correct market failures. Regardless of the justifications, governments believe that all other things being equal, incentives can influence the decisions of multinational enterprises (MNEs) regarding where and how much to invest. I argue that it cannot be presumed that the net economic impact of FDI will in all circumstances be positive. I demonstrate that there are various cost issues that are associated with the granting of tax incentives, and that the benefits of FDI for host countries might be insufficient to justify FDI promotion policies. Consequently, countries are advised to refrain from providing tax incentives to FDI. I emphasize, however, that the primary objection is to targeted tax incentives as opposed to general tax incentives. In this respect, there should be no distinction between developed countries and developing countries.
Keywords: foreign direct investment, tax incentives, multinational enterprises
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