International Issues

FDI, the Role of Policy

1. What are the two usual ways foreign investment enter a country? Which one of the two ways is less risky and why?

2. What are the kinds of incentives offered by various countries to attract FDI? Provide examples of incentives by different countries.

пÑ"? Countries offer incentives like tax concessions, tax holidays, tax credits, accelerated depreciation, export subsidies, import entitlements, and subsidized utility rate to attract FDI.

пÑ"? The People’s Republic of China offers income tax exemptions to foreign enterprises on the first and second years, and 50 percent income tax reduction from the third to fifth years.

пÑ"? Thailand allows duty exemptions on imported raw materials and capital goods from FDI projects location in export processing zones

пÑ"? Viet Nam also provides duty exemptions on imported capital goods and lower water and electricity rates for firms locating in export processing zones

3. What are the major factors that influence a foreign firm in selecting investment location?

пÑ"? Size and expected growth of the market to be served

пÑ"? Long term macroeconomic and political stability

пÑ"? Skilled or trained workers

пÑ"? Transportation and communications infrastructure

пÑ"? Tax breaks and subsidies generally influence investments location decisions only at the margin

4. What are some of the policies that do not serve the interest of the host country on the long term?

пÑ"? Policies ostensibly designed to maximize net benefits of FDI for recipient economies ignore their effects on incentives for investors and result in subscale manufacturing plants, frequently through mandated joint ventures, which are not allowed to source inputs freely and contribute little to the country’s development

пÑ"? Arrangements between foreign investors and host economy authorities blocking other new entrants to the industry or inhibiting alternative sources of supply are also common but generally not in the best interests of the host economy on the long term

5. How do trade pacts and alliances impact the decision of influence a foreign firm in selecting the investment location?

пÑ"? Foreign investors desiring to protect their investments and receive favorable tax treatment on their global profits and host countries wishing to attract greater inflows of FDI have entered into thousands of bilateral and, increasingly, regional agreements related to FDI.

пÑ"? In bilateral and multilateral trade and investment negotiations, most favored nation (MFN) treatment obliges a host economy to offer equally advantageous investment conditions to potential investors from all treaty signatories.

пÑ"? National treatment (nondiscrimination) requires similar treatment of both foreign and domestic investors

пÑ"? Bilateral agreements (BITs) also shape FDI policy