Madies, ThierryDethier, Jean-Jacques2012-03-192012-03-192010-05-01https://hdl.handle.net/10986/3796The 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?CC BY 3.0 IGOADDED TAXAGENCY PROBLEMASYMMETRIC INFORMATIONAUCTIONAUCTIONSBAILOUTBIDBIDSBONDBUDGET CONSTRAINTBUDGET CONSTRAINTSBUSINESS OPPORTUNITIESBUSINESS TAXBUSINESS TAXESCAPITAL FLIGHTCAPITAL FLOWSCAPITAL FORMATIONCAPITAL IMPORTERCENTRAL BANKCENTRAL GOVERNMENTCENTRAL GOVERNMENTSCITIESCOASTAL PROVINCESCOMMITMENT DEVICECOMMON MARKETCOMPETITIVE MARKETSCORPORATE INCOME TAXCORPORATE TAXCORPORATE TAX RATECORPORATE TAX RATESCORPORATE TAXESCOST OF CAPITALCOUNTRY MARKETCOUNTRY RISKCURRENT EXPENDITURESDECENTRALIZATIONDEMOCRACYDEVELOPING COUNTRIESDEVELOPING COUNTRYDEVELOPING ECONOMIESDIFFERENTIALSDIRECT PAYMENTSDISTRICTSDOMESTIC PRICESDOUBLE TAXATIONECONOMIC ANALYSISECONOMIC DEVELOPMENTECONOMIC GROWTHECONOMIC INTEGRATIONEFFECTIVE TAX RATESENTERPRISE OPERATIONSEQUALIZATIONEQUIPMENTSEQUITY INVESTMENTEXCESS SUPPLYEXPENDITUREEXPENDITURE NEEDSEXPENDITURES ON INFRASTRUCTUREEXPORTEREXTERNALITIESFEDERAL SUBSIDIESFEDERAL TRANSFERFINANCIAL CRISISFINANCIAL MARKETSFINANCIAL STUDIESFISCAL AUTONOMYFISCAL DECENTRALIZATIONFISCAL FEDERALISMFISCAL POLICYFISCAL TRANSFERSFIXED CAPITALFIXED INVESTMENTFOREIGN DIRECT INVESTMENTFOREIGN FIRMSFOREIGN INVESTMENTFOREIGN INVESTORSFOREIGN MARKETFOREIGN TAX CREDITSFREE TRADEFREE TRADE AGREEMENTGLOBALIZATIONGOVERNMENT BORROWINGGOVERNMENT POLICIESGOVERNMENT REVENUEHARD BUDGET CONSTRAINTSHARMONIZATIONHOME COUNTRYHOST COUNTRIESHOST COUNTRYHOST GOVERNMENTSHUMAN CAPITALIMPLICIT TAXINCOME TAXINDUSTRIAL COUNTRIESINFORMATION ASYMMETRIESINFRASTRUCTURE DEVELOPMENTINFRASTRUCTURE INVESTMENTINSURANCEINSURANCE COMPANIESINTANGIBLEINTANGIBLE ASSETSINTERNATIONAL BANKINTERNATIONAL CAPITALINTERNATIONAL CAPITAL MOBILITYINTERNATIONAL INVESTORSINTERNATIONAL TRADEINVESTINGINVESTMENT BANKINVESTMENT CLIMATEINVESTMENT DECISIONINVESTMENT DECISIONSINVESTMENT PROJECTSJURISDICTIONJURISDICTIONSLEVEL OF GOVERNMENTLOCAL AUTONOMYLOCAL BUSINESSLOCAL GOVERNMENTLOCAL GOVERNMENTSLOCAL PUBLIC GOODMARGINAL COSTMARKET CONDITIONMARKET SIZEMAYORMUNICIPALITIESMUNICIPALITYNATURAL RESOURCENET CAPITALOPPORTUNISTIC BEHAVIOROPPORTUNITY COSTOUTPUTPERSONAL INCOMEPOLICY CHOICESPOLICY DECISIONSPOLITICAL ACCOUNTABILITYPOLITICAL STABILITYPORTFOLIOPOSITIVE EXTERNALITIESPOTENTIAL INVESTORSPRIVATE CAPITALPRIVATE LOANSPRIVATE SECTORPROPERTY TAXPROVINCEPROVINCESPROVINCIAL GOVERNMENTPROVINCIAL GOVERNMENTSPROVINCIAL LEVELPROVINCIAL TAXPROVINCIAL TAXESPROVISIONSPUBLICPUBLIC CONSUMPTIONPUBLIC ECONOMICSPUBLIC EXPENDITUREPUBLIC EXPENDITURESPUBLIC FINANCEPUBLIC FUNDSPUBLIC GOODSPUBLIC INFORMATIONPUBLIC INFRASTRUCTUREPUBLIC INVESTMENTPUBLIC LOANSPUBLIC POLICYPUBLIC SECTORPUBLIC SPENDINGREGIONAL INTEGRATIONREGIONAL TRADERESOURCE ALLOCATIONRETURNRETURNSREVENUE SHARINGSMALL COUNTRIESSOCIAL VALUESOFT BUDGET CONSTRAINTSOFT BUDGET CONSTRAINTSSUB-NATIONALSUB-NATIONAL GOVERNMENTSUBNATIONALSUBNATIONAL GOVERNMENTSUBNATIONAL GOVERNMENTSTAXTAX AUTONOMYTAX BASETAX BASESTAX BREAKSTAX BURDENTAX CHANGESTAX COMPETITIONTAX CONCESSIONSTAX COORDINATIONTAX CREDITTAX CREDITSTAX DIFFERENTIALSTAX INCENTIVESTAX PAYMENTSTAX PLANNINGTAX POLICIESTAX POLICYTAX PREFERENCESTAX PROVISIONTAX PURPOSESTAX RATETAX RATESTAX REBATESTAX REDUCTIONTAX REGIMETAX REGIMESTAX REVENUETAX REVENUE SHARINGTAX REVENUESTAX SPARINGTAX TREATMENTTAX TREATYTAXATIONTOTAL GOVERNMENT EXPENDITURETRANSACTIONTRANSACTION COSTSTRANSITION COUNTRIESTREATIESTREATYURBAN ECONOMICSUSE TAXUTILITIESVALUATIONWORLD TRADEWorld Bank10.1596/1813-9450-5311