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

Northwestern Journal of International Law & Business, Dec 1985

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.

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

Alternatives to Tax Incentive Policies In Search of Effective Policies for Foreign Direct Investment: Alternatives to Tax Incentive Policies 0 This Article is brought to you for free and open access by Northwestern University School of Law Scholarly Commons. It has been accepted for inclusion in Northwestern Journal of International Law & Business by an authorized administrator of Northwestern University School of Law Scholarly Commons Recommended Citation Kojo Yelpaala, In Search of Effective Policies for Foreign Direct Investment: Alternatives to Tax Incentive Policies, 7 Nw. J. Int'l L. & Bus. 208 (1985-1986) Part of the International Law Commons; International Trade Commons; and the Tax Law - Commons In Search of Effective Policies for Foreign Direct Investment: Incentive Policies Kojo Yelpaala* Alternatives to Tax CONTENTS I. INTRODUCTION ........................................... II. III. The Need for Reevaluation ........................... THE MNE SYSTEM AND INCENTIVES ..................... INTANGIBLE ASSETS THEORY OF FDI ..................... Market Imperfections and FDI ....................... B. Cost Factors in FDI .................................. C. Intangible Assets-Incentive Policy Implications ....... 1. Market Imperfections and Incentive Policies ........ 2. Cost and Incentive Policies ........................ Summ ary ............................................ versity of Ghana, 1970; M.B.A. Bowling Green State University, Bowling Green, Ohio, 1972; Msc. 1979; S.J.D. University of Wisconsin-Madison, 1985. I am immensely grateful to Professors Irish, Bilder, and Strasma ofthe University of Wisconsin-Madison who were first exposed to some of the views expressed in this article in my dissertation and gave me very helpful comments. I am also grateful to the University of Wisconsin-Madison Law School for supporting the research on my dissertation and the McGeorge School of Law for the assistance that facilitated the completion of this work. 234 237 239 241 242 243 246 247 250 253 254 258 260 261 262 263 Summary ............................................ INTERNALIZATION THEORY OF FDI ....................... A. Incentive Policy Implications ..................... 1. Tax Incentive Policy Implications .................. 3. Other Policy Implications.......................... VI. CONCLUSION ............................................. I. INTRODUCTION It is now largely recognized that the multinational enterprise ("MNE") can play a significant role in the industrialization of a number of different countries.1 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 1 Several studies have identified the potential ofthe MNE in the development of host countries. See, e.g., UNITED NATIONS CENTRE ON TRANSNATIONAL CORPORATIONS ("UNCTC"), TRANSNATIONAL CORPORATIONS IN WORLD DEVELOPMENT: A RE-EXAMINATION (1978); UNITED NATIONS CENTRE ON TRANSNATIONAL CORPORATIONS, TRANSNATIONAL CORPORATIONS IN WORLD DEVELOPMENT: THIRD SURVEY, U.N. Doc. ST/CTC/46 (1983) [hereinafter UNCTC, THIRD SURVEY]; Hymer, The MultinationalCorporationand the Law of Unevendevelopment, in ECONOMIcS AND WORLD ORDER: FROM THE 1970s TO THE 1990s (J. Bhagwati ed. 1972). See also THE MULTINATIONAL CORPORATION IN THE 1980s (C. Kindleberger & D. Audretsch eds. 1983); R. VERNON, STORM OVER THE MULTINATIONALS: THE REAL ISSUES (1977) [hereinafter R. VERNON, STORM]; G. REUBER, PRIVATE FOREIGN INVESTMENT IN DEVELOPMENT (1973). More recent indications of the belief in the potential of MNEs to affect the development of host countries can be found in the United States' encouragement of foreign direct investment ("FDI") in the Caribbean Basin Region. The commitment of the Reagan Administration to encouraging United States foreign investors to invest in the Caribbean Basin Region was well articulated by President Reagan; see Caribbean Basin Initiative, Address Before the Permanent Council of the Organization of American States ("OAS"), 18 WEEKLY COMP. PRES. Doc. 217 (Feb. 24, 1982). See also Caribbean Basin Initiative Legislation, Statement by the President, 19 WEEKLY COMP. PRES. Doc. 240 (Feb. 16, 1983); Caribbean Basin Initiative, Remarks to Ambassadors of Member Nations of the OAS, 18 WEEKLY COMP. PRES. Doc. 1655 (Dec. 22, 1982). See also H.R. 6715, 97th Cong., 2d Sess., 128 CONG. REc. 3968 (1982)-a bill to amend the Internal Revenue Code of 1954 to allow a credit against income tax for the use of certain forms of business insurance for new business activities in designated Caribbean 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. Whil (...truncated)


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Kojo Yelpaala. In Search of Effective Policies for Foreign Direct Investment: Alternatives to Tax Incentive Policies, Northwestern Journal of International Law & Business, 1985, Volume 7, Issue 2,