Negative Effects of Tax Incentives Towards Foreign Direct Investment: a Hypothetical Report

Topics: Investment, Macroeconomics, Foreign direct investment Pages: 13 (4747 words) Published: October 24, 2011
Executive Summary
The tax incentive policy widespread around the globe in the 1990s due to the belief that attracting multinational firms would create more job opportunities and eventually better off for the whole economy. There have been some evidences that foreign direct investment (FDI) benefited developed countries’ economy. Recently, the Australian government has proposed a new policy that would give fairly large incentives to foreign direct investors. However whether the FDI would benefit Australia’s automobile industry and textile industry, is questionable, and needs to be critically evaluated. This report has been written by the Manufacturers Association, and it is believed that there would be more disadvantages than advantages to Australian economy, especially automobile industry and textile industry. Giving incentives to FDI only helps to destroy small business sectors, and will have a negative impact on the government’s revenue. For the future growth of the industry and businesses, revising the government’s proposal will be important. The Manufacturers Association suggests three main ideas towards the new policy, and the recommendation for the government is as follows. The government should establish and improve laws that are relating to market's assessment, regulations and the standard system as soon as possible. The government should carry out some policies to ensure market competitiveness. The government should play a catalytic role in corporate mergers.

This report has been written by the manufacturers association due to a new government policy proposal that was introduced lately. The new proposal states that the government will give significant tax incentives to foreign investors who are prepared to invest in expanding the nation’s manufacturing base in automotive and textile industries. However, there may be some problems that might arise with this new proposal. Thus the objectives of this report are to critically evaluate advantages and disadvantages of tax incentives towards foreign investors, and to suggest or recommend a better proposal for the sake of future growth in domestic businesses and the whole economy. This report examines policy effects on two different areas: policy effects on the industry, and policy effects on companies. There have been numerous governments that tried to attract foreign direct investors (FDI) by offering tax incentives, since the 1990s. (Li, 2006) The reason why the host countries wanted foreign direct investors was because of the belief that foreign firms and their developed technology would encourage transformation of domestic technology, and it seemed like that some countries have proven this belief. However, attracting multinational companies was becoming harder as the number of competitors, host countries that also wanted foreign investors, increased. (Morisset & Pirnia, 1999) To attract new foreign investors, host countries offer tax incentives, such as lower income taxes, income tax holidays, import duty exemptions, and subsidies for infrastructure. (Aitken & Harrison, 1999) Offering tax incentives was definitely a great way to attract multinational companies, and this phenomenon soon became a global trend in the 1990s. For example, the Korean government changed the law foreign investment law to offer more incentives to FDI in 1998. (Yun, 2001) Slovakia offered a 20 precents tax cut in corporate tax. (Turkenburg, 1993) The widespread of this phenomenon was because developing countries’ wanted to globalize their economy, and also they needed employment opportunities. By adopting this tax incentive programs, many countries faced a dramatic change in both economy and politics. Adopting the program ensured globalization in economy, and short-term employment needs. However, there have been some issues that need to be thought and evaluated very critically. According to Quan Li, (2006) giving tax incentives to foreign investors could have a negative effect...
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