How tax policy and incentives affect
            foreign direct investment - a review
With an increasing number of governments
            competing to attract multinational companies, fiscal
            incentives have become a global trend that has grown
            considerably in the 1990s. Poor African countries rely on
            tax holidays, and import duty exemptions, while industrial
            Western European countries allow investment allowances, or
            accelerated depreciation. Have governments offered
            unreasonably large incentives to entice firms to invest in
            their countries? The authors review the literature on tax
            policy, and foreign direct investment, and explore
            possibilities for research. They observe that tax incentives
            neither make up for serious deficiencies in a country's
            investment environment, nor generate the desired
            externalities. Long-term strategies to improve human, and
            physical infrastructure - and, where necessary, to
            streamline government policies and procedures - are more
            likely than incentives to attract genuine long-term
            investment. But more recent evidence has shown that when
            other factors - such as infrastructure, transport costs, and
            political and economic stability - are more or less equal,
            the taxes in one location may have a significant effect on
            investors' choices. This effect is not straightforward,
            however. It may depend on the tax instrument used by the
            authorities, the characteristics of the multinational
            company, and the relationships between the tax systems in
            the home country, and recipient countries. For example, tax
            rebates are more important for mobile firms, for firms that
            operate in multiple markets, and for firms whose home
            country exempts any profit earned abroad (Canada, France)
            rather than using tax credit systems (Japan, the United
            Kingdom, the United States). Even if tax incentives were
            quite effective in increasing investment flows, the costs
            might well outweigh the benefits. Tax incentives are not
            only likely to have a negative direct effect on fiscal
            revenues, but also frequently create significant
            opportunities for illicit behavior by tax administrators,
            and companies. This issue has become crucial in emerging
            economies, which face more severe budgetary constraints, and
            corruption than industrial countries do. The authors suggest
            research in five areas: 1) The eventual non-linear impact of
            tax rates on the investment decisions of multinational
            companies. 2) the effect of tax policy on the composition of
            foreign direct investment (for example, green-field,
            reinvested earnings, and mergers and acquisitions). 3) The
            development of new technologies, and global companies that
            are likely to be more sensitive to, and able to exploit
            incentives. 4) The need for a global approach to the
            taxation of multinational companies. 5) The question of
            whether tax incentives should be directed only at (foreign)
            investors that make the "right things" (such as
            environmentally safe products) or more broadly at those that
            bring jobs, technology transfers, and marketing skills.