Are FDI incentive programs a good investment for the host country?

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

This article discusses the relative merits of investment incentives
in the light of the current competition for foreign direct investment
among economies in transition. The case of the Czech National
Incentive Scheme is evaluated in terms of three major interrelated
issues: “crowding in” additional foreign direct investment, costbenefit
considerations and quality of investment. It may be hard
to meet by these criteria establishing ex ante conditions for
investors applying for incentives. The Czech scheme has “crowded
in”, at best, 10% more foreign direct investment than in a
hypothetical case of no incentives. The decisive question is really
whether the programme has succeeded in improving the quality
of investment. The findings of this article suggest that screening
rules as applied by the Government of the Czech Republic may
have been successful in this respect. However, as the scheme is
being scaled up, quantity targets start to threaten quality concerns.
A simple cost-benefit calculation suggests that, under a worstcase
scenario of maximum tax relief to foreign investors, the
absence of spillovers and capture of comparative advantages by
investors, the social price may be in excess of $40,000 per job
created. This price can be compensated only by such opportunity
costs as the burden of unemployment outlays, or losses due to
not attracting higher-quality foreign direct investment
Original languageEnglish
JournalTransnational Corporations
Volume13
Issue number1
Pages (from-to)109-148
Number of pages40
ISSN1014-9562
Publication statusPublished - 1 Jun 2004
Externally publishedYes

Cite this

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title = "Are FDI incentive programs a good investment for the host country?",
abstract = "This article discusses the relative merits of investment incentivesin the light of the current competition for foreign direct investmentamong economies in transition. The case of the Czech NationalIncentive Scheme is evaluated in terms of three major interrelatedissues: “crowding in” additional foreign direct investment, costbenefitconsiderations and quality of investment. It may be hardto meet by these criteria establishing ex ante conditions forinvestors applying for incentives. The Czech scheme has “crowdedin”, at best, 10{\%} more foreign direct investment than in ahypothetical case of no incentives. The decisive question is reallywhether the programme has succeeded in improving the qualityof investment. The findings of this article suggest that screeningrules as applied by the Government of the Czech Republic mayhave been successful in this respect. However, as the scheme isbeing scaled up, quantity targets start to threaten quality concerns.A simple cost-benefit calculation suggests that, under a worstcasescenario of maximum tax relief to foreign investors, theabsence of spillovers and capture of comparative advantages byinvestors, the social price may be in excess of $40,000 per jobcreated. This price can be compensated only by such opportunitycosts as the burden of unemployment outlays, or losses due tonot attracting higher-quality foreign direct investment",
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Are FDI incentive programs a good investment for the host country? / Jensen, Camilla.

In: Transnational Corporations, Vol. 13, No. 1, 01.06.2004, p. 109-148.

Research output: Contribution to journalJournal articleResearchpeer-review

TY - JOUR

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AU - Jensen, Camilla

PY - 2004/6/1

Y1 - 2004/6/1

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AB - This article discusses the relative merits of investment incentivesin the light of the current competition for foreign direct investmentamong economies in transition. The case of the Czech NationalIncentive Scheme is evaluated in terms of three major interrelatedissues: “crowding in” additional foreign direct investment, costbenefitconsiderations and quality of investment. It may be hardto meet by these criteria establishing ex ante conditions forinvestors applying for incentives. The Czech scheme has “crowdedin”, at best, 10% more foreign direct investment than in ahypothetical case of no incentives. The decisive question is reallywhether the programme has succeeded in improving the qualityof investment. The findings of this article suggest that screeningrules as applied by the Government of the Czech Republic mayhave been successful in this respect. However, as the scheme isbeing scaled up, quantity targets start to threaten quality concerns.A simple cost-benefit calculation suggests that, under a worstcasescenario of maximum tax relief to foreign investors, theabsence of spillovers and capture of comparative advantages byinvestors, the social price may be in excess of $40,000 per jobcreated. This price can be compensated only by such opportunitycosts as the burden of unemployment outlays, or losses due tonot attracting higher-quality foreign direct investment

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