The Relation of Investment Incentives and Inflow of FDI: Case of Developing Countries and Ethiopia

Abstract

For economic, Social, or foreign direct investment promotion reasons, tax exemptions or incentives are common under tax laws of legal system of different nations. Under Ethiopian stamp duty laws, some areas of foreign investments are exempted from the liability of payment of same; documents that are exempted in accordance with international agreements and conventional treaties approved by Ethiopian government. The objective of this study article is to show the relationship between incentives and foreign direct investment inflows in developing countries and the Ethiopian context. The thesis employs research methodology that follows conceptual and legal analyses and interpretation in a comparative manner. The meaning and nature of investment incentives under Ethiopian investment laws and other jurisdiction, determinant factors driving and influencing the inflows of FDI under developing counties and Ethiopia are discussed. The dominant model of low income countries/developing countries investment incentive i.e. tax exemption and tax holiday’s contribution and effectiveness in the attracting of FDI, and various economics researchers findings on the relationship between income tax incentives and FDI inflows are critically analyzed with the various laws and Ethiopian investment laws. Finally from the findings of different data we can conclude that weak investment climate cannot back up by providing tax incentives to attract FDI in developing countries and Ethiopia. The findings of the study revealed that tax incentive packages that are employed to attract FDI in developing countries are not in a position to accommodate and fulfill the comprehensive driving factors of the FDI and the interest of investors and host states.