Competition for FDI Sample Clauses

Competition for FDI. It is sometimes argued that governments should adopt policies of fiscal incentives to encourage FDI. In practice, the policies have indeed been adopted quite frequently. However, while there may be a theoretical argument in favour of such incentives under rather extreme conditions, the general position of most economists is that incentive schemes are distortionary, inefficient and also costly. Moreover, a system of fiscal incentives may not even be effective to achieve the desired objective of attracting FDI because other countries that provide more generous fiscal incentives may divert FDI away from those countries that provide less generous incentives. Last but not least, competition for FDI is intense as more and more countries are hoping for a greater share of FDI inflows. Richer countries can provide more attractive incentives leading to further marginalisation of poorer countries. In order to reduce the likelihood of further marginalisation of poorer countries and the waste of resources needed to finance these incentives, the recourse to fiscal incentives as a stimulus to attract FDI must be eliminated. The problem is, however, how to convince countries to stop using incentives even if they know that these policies are wrong. In the presence of competition from other countries using fiscal incentives, it is very unlikely that any single country will be willing to abandon the practice of fiscal incentives unilaterally. The country will be prepared to do so only if other countries are prepared to give up their policies of fiscal incentives as well. Such a concerted action would clearly require an international agreement like MAI.