Publication: Using Tax Incentives to Compete for Foreign Investment : Are They Worth the Costs?
Loading...
Published
2001
ISSN
Date
2013-06-17
Editor(s)
Abstract
The book contains complementary essays on the use of tax incentives, to attract foreign direct investment (FDI). The first essay presents results of the authors' original research, and explores FDI, and issues of tax incentives, in the context of Indonesia. Their results mostly support the arguments made against incentives, particularly they find little evidence that when Indonesia eliminated tax incentives, there was any decline in the rate of FDI into the country. Similarly, the second essay surveys the research of others on the same topic, and pertaining to the same issues discussed in the first essay. They show that results of other researchers, are generally consistent with the findings of the research in Indonesia, notably that tax incentives, neither affect significantly the amount of direct investment that takes place, nor usually determine the location to which investment is drawn. Nevertheless, recent evidence has shown that when factors such as political, and economic stability, infrastructure, and transport costs are more, or less equal between potential locations, taxes may exert a significant impact. This is evidenced by the growing tax competition in regional groupings (i.e., the European Union) or, at the sub-regional level within one country (i.e., the United States). Both essays provide a basis for much more sophisticated analysis by policymakers than previously, and, both are important because they question governments' institutional arrangements that create agency problems with respect to tax incentive policies.
Link to Data Set
Citation
“Wells, Louis T., Jr.; Allen, Nancy J.; Morisset, Jacques; Pirnia, Neda. 2001. Using Tax Incentives to Compete for Foreign Investment : Are They Worth the Costs?. FIAS Occasional Paper;No. 15. © World Bank. http://hdl.handle.net/10986/13979 License: CC BY 3.0 IGO.”
Digital Object Identifier
Associated URLs
Associated content
Other publications in this report series
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Tax Incentives : Using Tax Incentives to Attract Foreign Direct Investment(World Bank, Washington, DC, 2003-02)The increasing mobility of international firms and the gradual elimination of barriers to global capital flows have stimulated competition among governments to attract foreign direct investment, often through tax incentives. This note reviews the debate about the effectiveness of tax incentives, examining two much-contested questions: can tax incentives attract foreign investment? And what are the costs of using them?Publication Patterns of Foreign Direct Investment Flows and Trade-Investment Inter-Linkages in Southern Africa : Linking Middle-Income and Low-Income Neighbors(World Bank, Washington, DC, 2010-05)This report discusses the patterns of foreign direct investment flows and trade-investment inter-linkages in Southern Africa. It will discuss how cross-border investment flows create a possible channel of growth spillover from South Africa and other MICs to LICs in the subregion, and identify the roles of subregional trade and investment flows in generating these neighborhood effects with LICs. After an introduction with background on the subregion of Southern Africa, Section 2 provides facts on the patterns of trade in Southern African countries to illustrate how much (or little) the Southern African subregion is integrated today and whether or not intraregional trade is growing. Section 3 presents aggregate trends in foreign direct investment flows (and stocks) in SSA, discusses how SASR is situated in such trends, and analyzes the emerging trends of intra-SASR cross-border investments, largely driven by South Africa. Section 4 analyzes trade-investment linkages in Southern Africa at the firm level. Section 5 discusses areas of domestic policies in enhancing trade and foreign direct investment in Southern Africa. Section 6 summarizes the findings from this analysis and discusses their policy implications.Publication Administrative Barriers to Foreign Investment : Reducing Red Tape in Africa(Washington, DC: International Finance Corporation and the World Bank, 2000)The book consists of two papers which provide an overview of administrative barriers in Africa, and a very in-depth look at how one country, Mozambique, used a very large foreign investment as a mechanism to begin to tear them down. The first paper is based on a series of country-specific studies on administrative barriers done by Foreign Investment Advisory Service (FIAS) and the United States Agency for International Development. These studies covered Ghana, Mozambique, Namibia, Tanzania, and Uganda. Each country study relied on review of primary materials, laws, and regulations. The second paper is a detailed look at how the administrative barriers that existed in Mozambique threatened to derail the huge Mozal aluminum smelter that was proposed by South African investors. Not only were the barriers overcome for this special project but also the Government used the knowledge gained in the process to reduce barriers for all investors and establish institutions that could facilitate other investments. The message in both papers is that administrative barriers constitute a significant impediment to foreign direct investment in Africa. Many of the administrative procedures required of investors have no real justification. Removal of unnecessary barriers and streamlining other administrative procedures require detailed efforts by governments involving the exercise of significant political leadership.Publication The Impact of Export Tax Incentives on Export Performance : Evidence from the Automotive Sector in South Africa(2011-03-01)The original goal of the Motor Industry Development Program was to help the automotive industry in South Africa adjust to trade liberalization and become internationally competitive. In simple terms, it consists of an import/export complementation arrangement, whereby the local value-added of components or built-up vehicles exported earns credits that can be used to rebate import duties on components and vehicles. This study provides a first attempt at a quantitative analysis of the Motor Industry Development Program using the difference-in-difference methodology, in order to assess to what extent the program was effective in improving South Africa's automotive export performance during 1996-2006. The authors take a two-tier approach. First, they perform a comparative study using different manufacturing sectors within South Africa; second, they apply this methodology to analyze South Africa and a number of comparator countries that are automotive producers and exporters. The analysis finds that the impact of the program on automotive exports in South Africa is positive and significant. In particular, (i) the largest response to the program in terms of improved manufacturing exports occurs with a delay after the adoption of the law, suggesting that exports need time to fully react to the incentives; and (ii) in turn, the effectiveness of the tax incentives fades in time, reaffirming the common belief that tax incentives may affect some business decisions particularly in the short run, but they are not a primary consideration for investors in the long run.Publication Fiscal Competition in Developing Countries : A Survey of the Theoretical and Empirical Literature(2010-05-01)The last two decades have witnessed a sharp increase in foreign direct investment (FDI) flows and increased competition among developing countries to attract FDI, resulting in higher investment incentives offered by host governments and removal of restrictions on operations of foreign firms in their countries. Fiscal competition between governments can take the form of business tax rebates, productivity-enhancing public infrastructure or investment incentives such as tax holidays, accelerated depreciation allowances or loss carry-forward for income tax purposes. It can take place between governments of different countries or between local governments within the same country. This paper surveys the recent theoretical and empirical economic literature on decentralization which attempts to answer three questions. First, does theoretical literature on fiscal competition and "bidding races" contribute to a better understanding of such phenomenon in developing countries? Second, are FDI inflows in developing countries sensitive to fiscal incentives and is there empirical evidence of strategic behavior from the part of developing countries in order to attract FDI? Third, what evidence is there about fiscal competition among local governments in developing countries?
Users also downloaded
Showing related downloaded files
Publication Digital Public Infrastructure and Development(Washington, DC: World Bank, 2025-03-11)DPI is an approach to digitalization focused on creating “foundational, digital building blocks designed for the public benefit.” By providing essential digital functions at society scale that can be reused across sectors, DPIs enable public and private service providers to build on these systems, innovate, and roll out new services more quickly and efficiently. Common systems built as DPIs include digital identity and electronic signatures, digital payments, and data sharing. However, to provide DPI functionality, these systems must embed principles such as inclusion, openness, modularity, inclusivity, user-centricity, privacy-by-design, and strong governance. This paper provides a common framework and primer on DPI for policymakers, practitioners, WBG staff, and the broader development community, including: • DPI Concepts and Theory of Change: This includes a working definition of DPI and its core characteristics, including the role of the private sector, how DPI differs from past approaches to digitalization, and the relationship between core DPI systems, sector-specific systems, other digital technologies, and broader ecosystem enablers and safeguards. The paper also articulates the potential benefits of DPI across a range of public and private sector services, as well as risks and challenges for implementation and adoption. • Considerations for Implementation: Drawing on the experiences of a diverse set of countries across different regions, income levels, and DPI approaches, the paper identifies common trends for building, scaling, and using DPIs that are safe and inclusive. This includes identifying what we know (and do not yet know) around different DPI design choices and models, implementation strategies, procurement, issues around use case integration and sequencing of DPI, and more. • Principles and Practical Lessons: Finally, it summarizes key lessons from countries’ experiences with DPI to date, highlighting critical success factors and risk mitigation strategies for policymakers, practitioners, and development partners. A separate volume provides examples of DPI from countries around the globe. By leveraging the opportunities presented by DPI, countries can accelerate their digital transformation journeys and achieve more inclusive and sustainable development. The World Bank Group is committed to supporting this crucial endeavor. The WBG’s new Global DPI Program will address key knowledge gaps and support countries in building safe, inclusive, and transformative DPI.Publication Pathways to Scale(Washington, DC: World Bank, 2025-07-03)In the Sahel, economic inclusion programs can achieve multiple objectives and are increasingly relevant in a context of overlapping crises. By addressing the multiple constraints faced by poor and vulnerable households, these programs can enable them to sustainably increase their income and assets and diversifying their livelihoods through a sequenced package of support. The packages typically include the formation of savings groups, entrepreneurship training, coaching, community sensitization, life skills training, and a productive grant. There is a strong body of evidence demonstrating that economic inclusion programs can play a critical role in creating self employment opportunities and increasing resilience to shocks. As a result, these programs are particularly relevant in countries highly exposed and vulnerable to the impacts of climate change and those affected by fragility, conflict, and violence (FCV), both of which disproportionately affect poor households and women. The Sahel is one of the most climate-vulnerable regions globally, with rising temperatures, extreme weather events, and land degradation threatening livelihoods and economic stability. A large share of the population depends on agriculture and livestock (around 70 percent of the population in Burkina Faso, Chad, Mali and Mauritania, and around 60 percent of the rural population in Senegal), and the region is also experiencing multiple conflicts and instability.Publication Digital Progress and Trends Report 2023(Washington, DC: World Bank, 2024-03-05)Digitalization is the transformational opportunity of our time. The digital sector has become a powerhouse of innovation, economic growth, and job creation. Value added in the IT services sector grew at 8 percent annually during 2000–22, nearly twice as fast as the global economy. Employment growth in IT services reached 7 percent annually, six times higher than total employment growth. The diffusion and adoption of digital technologies are just as critical as their invention. Digital uptake has accelerated since the COVID-19 pandemic, with 1.5 billion new internet users added from 2018 to 2022. The share of firms investing in digital solutions around the world has more than doubled from 2020 to 2022. Low-income countries, vulnerable populations, and small firms, however, have been falling behind, while transformative digital innovations such as artificial intelligence (AI) have been accelerating in higher-income countries. Although more than 90 percent of the population in high-income countries was online in 2022, only one in four people in low-income countries used the internet, and the speed of their connection was typically only a small fraction of that in wealthier countries. As businesses in technologically advanced countries integrate generative AI into their products and services, less than half of the businesses in many low- and middle-income countries have an internet connection. The growing digital divide is exacerbating the poverty and productivity gaps between richer and poorer economies. The Digital Progress and Trends Report series will track global digitalization progress and highlight policy trends, debates, and implications for low- and middle-income countries. The series adds to the global efforts to study the progress and trends of digitalization in two main ways: · By compiling, curating, and analyzing data from diverse sources to present a comprehensive picture of digitalization in low- and middle-income countries, including in-depth analyses on understudied topics. · By developing insights on policy opportunities, challenges, and debates and reflecting the perspectives of various stakeholders and the World Bank’s operational experiences. This report, the first in the series, aims to inform evidence-based policy making and motivate action among internal and external audiences and stakeholders. The report will bring global attention to high-performing countries that have valuable experience to share as well as to areas where efforts will need to be redoubled.Publication Digital Africa(Washington, DC: World Bank, 2023-03-13)All African countries need better and more jobs for their growing populations. "Digital Africa: Technological Transformation for Jobs" shows that broader use of productivity-enhancing, digital technologies by enterprises and households is imperative to generate such jobs, including for lower-skilled people. At the same time, it can support not only countries’ short-term objective of postpandemic economic recovery but also their vision of economic transformation with more inclusive growth. These outcomes are not automatic, however. Mobile internet availability has increased throughout the continent in recent years, but Africa’s uptake gap is the highest in the world. Areas with at least 3G mobile internet service now cover 84 percent of Africa’s population, but only 22 percent uses such services. And the average African business lags in the use of smartphones and computers as well as more sophisticated digital technologies that catalyze further productivity gains. Two issues explain the usage gap: affordability of these new technologies and willingness to use them. For the 40 percent of Africans below the extreme poverty line, mobile data plans alone would cost one-third of their incomes—in addition to the price of access devices, apps, and electricity. Data plans for small- and medium-size businesses are also more expensive than in other regions. Moreover, shortcomings in the quality of internet services—and in the supply of attractive, skills-appropriate apps that promote entrepreneurship and raise earnings—dampen people’s willingness to use them. For those countries already using these technologies, the development payoffs are significant. New empirical studies for this report add to the rapidly growing evidence that mobile internet availability directly raises enterprise productivity, increases jobs, and reduces poverty throughout Africa. To realize these and other benefits more widely, Africa’s countries must implement complementary and mutually reinforcing policies to strengthen both consumers’ ability to pay and willingness to use digital technologies. These interventions must prioritize productive use to generate large numbers of inclusive jobs in a region poised to benefit from a massive, youthful workforce—one projected to become the world’s largest by the end of this century.Publication Investment Commitments and the Number of New Projects Decline in the Middle East and North Africa(World Bank, Washington, DC, 2009-12)Private activity in infrastructure in the Middle East and North Africa declined sharply in 2008, according to just-released data from the Private Participation in Infrastructure Project database. Both investment commitments and the number of new projects declined, in both the first and second half of the year. Existing telecommunications operators accounted for most of the annual investment. The region's share of total investment commitments in developing countries in 2008 was less than 4 percent, down significantly from its 7.3 percent share in 2007. In 2008, 10 infrastructure projects with private participation reached financial or contractual closure in six low- or middle-income countries in the region. These involve investment commitments (hereafter, investment) of US$2.4 billion. Infrastructure projects implemented in previous years had additional commitments of US$3.6 billion, bringing total investment in 2008 to US$6 billion. This level represented a 49 percent drop from that in 2007 and was the lowest since 2003.