Best Policy Practices for Promoting Inward and Outward Foreign ...

Best Policy Practices for Promoting Inward and Outward Foreign ...

Government subsidies to foreign investors will increase

inward foreign direct investment, at the margin, presuming

that they are not matched by other governments.

Given the existence of spillover benefits to FDI, targeting

subsidies to potential foreign investors would seem

to be an advisable policy; however, extending such subsidies

is not necessarily an element of best practices.

For one thing, if subsidies are linked to investing in

“have not” locations, the spillover benefits to the host

economy are likely to be severely compromised. For

another, the fiscal burden of significant investment subsidies

implies either that taxes must be increased to pay

for the subsidies or that government expenditures in

other areas, including possible expenditures on public

services, must be reduced. Either of these initiatives

will discourage inward direct investment. On balance,

national, but particularly sub-national, units might be

more effective in attracting FDI, and in leveraging the

benefits of FDI and FDO, by emphasizing governance

and infrastructure improvements, rather than fiscal subsidies

to foreign investors.

Tax policies are, perhaps, the most controversial aspect

of best practices. Popular opinion, as well as anecdotal

evidence, suggests that lowering tax rates should encourage

increased investment, including investment by foreigners.

However, difficulties in accurately measuring

effective tax rates, particularly at the sub-national level

and for specific industries and companies, limit rigorous

empirical examination of the relationship between

tax rates and foreign investment. Furthermore, since

taxes help fund the provision of public goods, and since

the supply of public goods encourages investment, the

The Conference Board of Canada | 19

full impact of lowering tax rates might be to discourage

investment, if the supply of public goods is diminished

as a consequence. Since public sector investments are

moderated by a broad range of social considerations,

there may be no policy inferences that apply uniquely

to best practices for promoting foreign investment.

However, it seems fair to argue that investments focused

on improving the efficient operations of government,

modernizing and enhancing physical infrastructure capacity,

and improving innovation capabilities are particularly

relevant components of best practices.

Good framework policies encourage both increased

Fdi and greater spillover benefits from that Fdi .

The available evidence is much more conclusive for

best practices for FDI than for FDO. In particular, the

available evidence suggests that good framework policies

encourage both increased FDI and greater spillover

benefits from FDI. While it is plausible that those same

policies promote increased home-country spillover

benefits from FDO, there is simply not enough evidence

to support or disprove this presumption. While more

research on the home-country spillover benefits from

FDO is clearly desirable, there is no basis for imposing

policies that discourage FDO at the margin. Both FDI

and FDO are modes through which international production

becomes more specialized geographically, and

the benefits to production specialization are very wellestablished.

Framework policies that encourage FDI

will, over time, also encourage increased FDO.

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