FDI Incentives Pay – Politically
Vale Columbia FDI Perspectives Perspectives, No. 26, June 28, 2010
4 Pages Posted: 2 Sep 2010
Date Written: June 26, 2010
Despite broad skepticism about the benefits of globalization, the majority of U.S. states have offered lucrative tax incentives to attract investment. The size of these incentives is generally considered too large to be welfare enhancing, and many economists are skeptical of the effectiveness of these policies. Yet despite the mounting evidence to the contrary, the incentives offered by U.S. states (and foreign countries) continue and have actually increased in their generosity over time. In the fall of 2009, we sought to solve this puzzle by conducting an internet survey of 2,000 Americans as part of a Cooperative Congressional Election Study (CCES) project. In this survey, we included questions to assess how individuals feel about FDI and the individuals’ efforts to hold politicians accountable for its attraction. Our central finding is that politicians can use tax incentives to take credit for investment flowing into their district, or deflect blame for losing the competition for mobile firms. Thus, fiscal incentives, while economically inefficient, may be a useful tool for politicians to win reelection.
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