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
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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
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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.
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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.
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