Investment Incentives and the Global Competition for Capital

Abstract

Investment incentives and the global competition for capitalby Kenneth P. Thomas * Investment incentives (subsidies designed to affect the location of investment) are a pervasive feature of global competition for foreign direct investment (FDI). They are used by the vast majority of countries, at multiple levels of government, in a broad range of industries. They take a variety of forms, including tax holidays, grants and free land. Politicians, at least in the United States, may have good electoral incentives to use them. 1 The Philippines has been estimated to spend 1% of GDP on "redundant" investment incentives (the investment would have come without subsidy); Vietnam's incentives were estimated at 0.7% of GDP in 2002; and US state and local governments spend approximately US$ 46.8 billion per year on location subsidies. 2 This is just the tip of the iceberg, as most countries' incentive spending is poorly reported. Like all subsidies, investment incentives tend to be economically inefficient and make income distributions more unequal (by transferring funds from average taxpayers to owners of capital). At times, they subsidize environmentally harmful projects, such as building a shopping center in a wetlands area. 3 Incentives are not always a bad policy, but their use requires taking potential problems into consideration.

Estrategias e instrumentos de promoción de las inversiones: El caso de Costa Rica a la luz de las mejores prácticas internacionales

“…En tercer lugar, existe la posibilidad de generar "guerras de ofertas" entre distintos competidores, que lleven a que los costos de los incentivos superen los beneficios sociales de la inversión. Thomas (2011) argumenta que como consecuencia de estas "guerras", las empresas han empezado a considerar el proceso de selección del destino de la inversión como una actividad generadora de rentas en sí misma. Esto además de que, dependiendo del diseño del incentivo, se abre la posibilidad de que las multinacionales recurran a precios de transferencia para lograr reducir la carga tributaria concentrando sus ganancias en las localizaciones con baja imposición.…”

“…Transparencia, predictibilidad y estabilidad: si bien las "reglas de juego" no son inmutables, ya que tienen que adaptarse a la experiencia en la aplicación de los 2 También es importante definir el momento en que se pagará el incentivo ofrecido. Por un lado, Bartik (2007) -citado en Thomas (2011)-señala que los incentivos tienen un efecto mayor sobre la decisión de las empresas si son otorgados rápidamente, en parte por la alta tasa de descuento de las empresas para estimar los beneficios futuros. En contraste, Blömstrom y Kokko (2003) argumentan que los subsidios a I+D, educación y capacitación tienen mejores resultados si son pagados una vez que se llevan a cabo las actividades.…”

The commoditisation of automotive assembly: Canada as a cautionary tale

“…By comparison, the next largest incentive was offered to Kia to build a 300,000 unit assembly plant in West Point, Georgia in 2006. That package, worth US$353 million, amounted to US$47 per vehicle (Thomas, 2010). Therefore, with the exception of the incentives offered to Volkswagen, the current Canadian practice is very competitive.…”

“…By comparison, the largest known incentive package was offered to Volkswagen to build an assembly plant with an annual capacity of 150,000 vehicles in Chattanooga, Tennessee in 2008. That package was valued at US$450 million (Thomas, 2010;Jacobs, 2015). Over 25 years, this amounts to a US$120 incentive per vehicle.…”

The Challenges and Trajectories of EU Competition Policy in the Twenty-first Century

“…Central and Eastern European countries' transition to market economies and their accession to the EU have created alternative locations for investment on the European continent. The member states have also faced intense competitive pressures from emerging economies, particularly from the BRIC (Brazil, Russia, India and China) countries, which are marked by strong state interference in the form of subsidies, tax breaks and privileged bank loans (Commission 2010a, 6-7;Li 2006;Oman 2000;Thomas 2011). …”