In Search of Effective Policies for Foreign Direct Investment: Alternatives to Tax Incentive Policies

It is now largely recognized that the multinational enterprise ("MNE") can play a significant role in the industrialization of a number of different countries. The major way in which the MNE can contribute toward the industrialization of a country is through foreign direct investment ("FDI"). To induce such MNE investment, several host countries have relied significantly on fiscal incentives in general and tax incentives in particular for over half a century. However, after several decades, the effects of these tax incentives on the motivation of MNEs to invest in incentive granting countries continues to be the focus of a heated debate.

While some believe that tax incentives do actually motivate MNE investment behavior, others believe that such motivational effects are either negligible or nonexistent. This debate is hardly a trivial matter because whether MNEs are motivated or not by tax incentives has important implications for labor, business, and government policy of home countries.