Foreign Direct Investment Incentives Research Articles

The role of foreign direct investment and green technologies in facilitating the transition toward green economies in Latin America

This study investigates the role of foreign direct investment (FDI) in facilitating the transition toward low carbon societies in Latin America from 1990 to 2022, in order to investigate the effects of FDI among the green transition process and contribute to the design of new ad hoc green FDI policies. Additionally, we introduce the Low Carbon Transition Curve hypothesis as a framework for understanding the relationship between income and the transition to green economies in the selected countries. Through the application of cointegration regression analysis, preceded by the examination of unit roots and cointegration, we uncover notable findings. Our results indicate that the impact of FDI on the consumption of renewable energy exhibits heterogeneity across Latin American countries, as evidenced by the lack of statistical significance in the renewable/fossil fuel mix consumption of energy. However, it is important to note that FDI has a positive and significant effect on the promotion of renewable energy consumption. Furthermore, our analysis confirms the statistical significance of the income-low carbon transition hypothesis across all regression models, suggesting that income per capita plays a pivotal role as a driving factor in countries' transition to green economies. In light of these findings, it is recommended that countries utilize FDI to reduce their dependency on fossil fuels by offering incentives for green FDI, which can contribute significantly to the transition process. These practical implications can guide decision-making processes and support the implementation of measures that contribute to a more sustainable and environmentally conscious energy sector in Latin America.

South-to-North direct investment in a quality ladders model

ABSTRACT This paper develops a quality ladders model with endogenous technology-sourcing direct investment from the developing South to the developed North. In the model, Southern firms undertake innovation by setting up R&D subsidiaries in the North and transfer the state-of-the-art back to their parents when innovation succeeds. In contrast to previous models, we introduce outward foreign direct investment (FDI) of Southern multinationals, a new channel for international technology transfer from the North to the South, so as to capture the features of active technology seeking of the South. We also apply the model to examine the effects of Southern outward FDI incentives on innovation, production and welfare.

Linkages and Spillover Effects of South African Foreign Direct Investment in Botswana and Kenya

In recent decades, the impact of South African foreign direct investment in Africa has been captured by research and policy. This paper investigates linkages and spillover effects of South African foreign direct investment in Botswana and Kenya. The study uses primary data to investigate qualitative implications. The findings reveal that South African firms operate in sectors including retail, food-processing, and information and communication technology. Linkages forged in these sectors include supply, employee, joint venture, service, and institutional nexuses. Supply and service linkages create observable spillovers which point to the fact that younger local firms tend to benefit from South African firms in terms of technology transfer and training opportunities. Host country policymakers are therefore encouraged to provide favourable incentives for foreign direct investment to promote entrepreneurship. Other policy implications are also discussed.

The impact of incentive policies on foreign direct investment misallocation

Certain institutional barriers of China can hinder investments. This paper examines the impact of fiscal incentives and implicit incentive policies on the degree of resource distortions in FDI allocation by using the provincial data of manufactures from 1994 to 2013. This paper reviews the empirical literature, specifically addressing various types of incentives for Foreign Direct Investment (FDI) and how FDI can lead to resource reallocation effects. The analysis shows that fiscal incentive policies to inward FDI tend to decrease the resource misallocation, whereas implicit incentives increase the resource misallocation.

A new theoretical framework to assess Multinational Corporations’ motivation for Foreign Direct Investment: A case study on Vietnamese service industries

PurposeThis paper develops a new theoretical framework, based on eclectic paradigm and institution theory, to evaluate Multinational Corporations’ (MNCs’) incentives for Foreign Direct Investment (FDI). The new framework is applied as a case study in the service sector across Vietnam. Design/methodology/approachThis study applies the Structural Equation Modelling (SEM) approach to investigate the motivational factors of MNCs by using primary data on MNCs working in service industries in Vietnam. This paper introduces five motivational factors, and conducts a Confirmatory Factor Analysis (CFA) to study the construct validity of the research measures and to cluster the variables into common factors that can be used to present relationships among sets of interrelated variables. FindingsThe SEM results reveal that the key determinants of MNCs’ incentives to invest in service industries are market-seeking government policies and culture, all of which have significantly contributed to FDI. Originality/valueThis study offers new knowledge and insights into the factors that motivate FDI by MNCs in general and in service industries in Vietnam. The findings are plausible and in line with the recent economic reforms launched in Vietnam, along with the increased FDI inflows into the country in the last twenty-five years.

Free Zones, Foreign Ownership and Tax Incentives for Foreign Direct Investment in Qatar

Qatar offers specific Free Zones in order to encourage Foreign Direct Investment, as Free Zones Enterprises can be fully owned by non-Qataris, which is not the case of companies located in Non-Free Zones areas in Qatar. In fact, Free Zones offer huge tax incentives and do not provide any regulatory or legal restrictions to repatriate profits and investments. As Non-Free Zones are governed by a different law than the one applicable in Free Zones areas, taxation is slightly less favorable (corporate income taxes of 10% apply for ordinary companies) even if lots of activities are still tax exempted. The most significant difference lies in the ownership restrictions of Qataris companies. The present contribution is aiming at presenting the main tax and legal aspects of these two different options in Qatar, notably given the growing importance of Free Zones in this region.

Domestic R&D, Foreign Direct Investment and Welfare

AbstractThis paper provides a new rationale to examine the two‐way relationship between domestic research and development (R&D) and foreign direct investment (FDI), as well as their impacts on domestic welfare. Our analysis is based on the strategic interaction in cost‐reducing investment decisions between domestic firms and a foreign firm, which is different from the common factors that are discussed in the literature such as spillovers and technology sourcing. Our results are as follows. We show that domestic R&D investment may either increase or decrease the foreign firm's FDI incentives. Further, depending on the marginal cost of domestic firms, domestic R&D incentives can always increase regardless of the effects of domestic R&D investment on the foreign firm's FDI decision. Finally, we find that domestic welfare improves under domestic cost reduction if the slope of the marginal cost of domestic R&D investment is sufficiently small.

Decentralization of the Tax Legislation Process in New Caledonia – Originality, Impact and Limitations

This article looks at the unique constitutional status and extensive tax legislative powers of New Caledonia. It analyses the specific constitutional and institutional status of New Caledonia to show the effect of the decentralization process on the capacity of New Caledonian authorities to implement economic development reforms through tax legislation, such as the introduction of tax incentives for foreign direct investment.

Privatization in the presence of foreign competition and strategic policies

Recent evidence shows that developing and transition economies are increasingly privatizing their public firms and also experiencing rapid growth of inward foreign direct investment (FDI). In an international mixed oligopoly with strategic tax/subsidy policies, we analyze the interaction between privatization and FDI. We find that the incentive for FDI increases with privatization. However, the possibility of FDI reduces the degree of privatization. Our paper shows that FDI policies reducing the fixed-cost of undertaking FDI may need to complement the privatization policies to attract FDI and to improve domestic welfare.

FDI and Outsourcing in a Service Industry: Welfare Effects of Liberalising Trade and Investment

This study examines a foreign firm's entry decision and its effects on the host country's welfare in a model with a composite good in which both commodity and service generate utility for consumers. Along with the commodity it produces, a producer can provide the service by itself or outsource the service. The result shows that the incentive for foreign direct investment (FDI) in the service sector increases under liberalising trade in the final‐good market. Moreover, there exist policy combinations of trade and investment liberalisation, whereby the domestic firms' profitability is traded off with the host country's social welfare when the foreign firm provides a service through FDI or through outsourcing, respectively. Finally, the welfare after simultaneously liberalising trade and investment is not necessarily greater than that under autarky.

Innovation in Tow: R&D FDI and investment incentives

Multinational corporations (MNCs) increasingly internationalize research and development (R&D), but the distribution of foreign direct investment (FDI) in R&D differs from that of general FDI. I use data on US MNC affiliates’ investments abroad (2001–2008) to demonstrate that increasing value added predicts more future R&D FDI, as R&D FDI is an upgrade decision. I then use data on R&D investment incentives to show that, while governments spend resources on R&D incentives, these can be negative predictors of R&D FDI. The findings imply that government efforts are best directed at incremental encouragement of value-added activities, as efforts to jump to R&D FDI are misguided.

Economic Determinants of Inter- and Intra-FDI in East Asia

The authors searched for economic determinants of bilateral foreign direct investment (FDI) in 15 East and Southeast Asian economies between 1990 and 2005. Estimation results from a gravity model using market access, comparative advantage and policy-driven incentives as variables suggest that multinational companies inside and outside the region had dissimilar FDI incentives and concerns regarding relative factor costs, import duties, geographic distance, and language. In addition, the results suggest a positive relationship between increased regional trade and FDI in East and Southeast Asia.

Unionisation Structure and Outward Foreign Direct Investment

We analyse the effects of the unionisation structure on the incentive for outward foreign direct investment (FDI) and on union utility. The incentive for outward FDI is higher under a centralised union than under decentralised unions, irrespective of the number of firms in the industry. If the number of firms undertaking FDI is higher under a centralised union than under decentralised unions, wages and the union utility can be higher under the latter unionisation structure, depending on the competitiveness of the industry. There may not be a conflict of interest between domestic labour union and domestic industry about the unionisation structure.

Environmental Regulation: An Incentive for Foreign Direct Investment

AbstractEmpirical evidence has so far failed to confirm that lenient environmental regulation attracts investment from polluting firms. In a Cournot duopoly with a foreign firm and a domestic firm, we show that the foreign firm may want to relocate to the domestic country with stricter environmental regulation, when the move raises its rival domestic firm's cost by sufficiently more than its own. The domestic (foreign) country's welfare is (usually) lower with foreign direct investment.

EU enlargement and foreign direct investment into transition economies revisited

It is highly likely that EU accession negotiation had a large influence on foreign direct investment (FDI) into the Central and Eastern European countries involved therein. We found that as the membership talks progressed, the effect of attracting FDI to candidate states tended to increase gradually. It also became clear that EU member candidate countries experienced an adverse impact on FDI at the very final phase of the negotiation. This might have been due to the substantial revision of conventional FDI incentives, which most likely was the price paid for becoming new EU members. The relationship between the progress in the EU enlargement process and FDI received by the candidate countries was not a simple positive relationship, but followed a reverse J-shaped curve.

FDI distribution within China: An integrative conceptual framework for analyzing intra-country FDI variations

The literature on foreign direct investment (FDI) has evolved in separate theoretical silos and a holistic conceptualization is yet to emerge. Research has focused mostly on inter-country differences and not much on explaining intra-country FDI variations. Traditionally FDI locations have been evaluated through country-level FDI determinants even though provinces differ widely in infrastructure and other attributes. Further, neither is the varying importance of FDI determinants to different industries factored in, nor are the differing FDI incentives from national and provincial governments integrated into a single framework. To address these gaps this study synthesizes insights from three streams of FDI research and develops an integrative conceptual framework that can comprehensively analyze intra-country FDI inflows. We demonstrate the usefulness of the framework by empirically analyzing FDI trends within China’s 31 provinces. The study thus makes a substantive contribution by offering scholars, policy-makers, and practitioners a holistic conceptual and methodological approach for understanding FDI trends within a country.

Privatization, strategic foreign direct investment and host-country welfare

Recent evidence shows that developing countries and transition economies are increasingly privatizing their public firms and at the same time experiencing rapid growth of inward foreign direct investment (FDI). We show that there is a two-way causality between privatization and greenfield FDI. Privatization increases the incentive for FDI, which, in turn, increases the incentive for privatization compared to the situation of no FDI. The optimal degree of privatization depends on the cost difference of the firms, and on the foreign firm's mode of entry.

STAY OR LEAVE? CHOICE OF PLANT LOCATION WITH COST HETEROGENEITY

Using a two-country model, we examine location choices by two domestic firms when they serve only the domestic market and their cost structures differ. The findings indicate that whether the firm that has a greater incentive for foreign direct investment is more or less efficient depends on the differences in domestic and foreign marginal costs, trade costs, and the presence of fixed costs. Plant locations may not be uniquely determined. In particular, a small change in trade costs may reverse plant location. Moreover, a decrease in transport costs in the presence of foreign direct investment may deteriorate domestic welfare.

The supply of foreign direct investment incentives: subsidy competition in an oligopolistic framework

This paper examines the microeconomic motivation of governments to provide tax incentives for foreign direct investment. Author applies the classical models of oligopoly to subsidy competition, endogenousing investment incentives, but leaving tax rates exogenous. According to the conventional wisdom, subsidy competition leads to overprovision of incentives. This paper suggests that, in the oligopolistic framework, supranational coordination can either decrease or increase the supply of subsidies. Further, in the setting of subsidy regulation, the host country's corporate income tax rate has an ambiguous effect on the provision of incentives.

Privatisation, Strategic Foreign Direct Investment and the Host Country Welfare

Recent evidence shows that developing countries and transition economies are increasingly privatising their public firms and at the same time experiencing rapid growth of inward foreign direct investment (FDI). In an international mixed oligopoly, we analyse the interaction between privatisation and FDI. We show that privatisation increases the incentive for FDI, which in turn, increases the incentive for privatisation compared to the situation of no FDI. The optimal degree of privatisation depends on the cost difference between the public and the foreign firms, and on the foreign firm's mode of entry. We show that our results are robust with respect to the incentive contracts between the owners and the managers. The incentive for FDI and is higher under the incentive contract than under the no incentive contract, and the optimal degree of privatisation is almost always higher under the incentive contract than under the no incentive contract.