handbook-tb

Eric M. Zoltif the foreign investor owns a greater than 10 per cent stake in anenterprise, the investment is likely more than a mere passive holdingfor investment purposes. Foreign direct investment can be furtherdivided into direct transfers from a parent company to a foreign affiliatethrough debt or equity contributions and reinvested earnings bythe foreign affiliate.The different forms of foreign investment are also important, aseach form may respond differently to taxes. Types of foreign investmentinclude: (a) real investments in plant and equipment; (b) financialflows associated with mergers and acquisitions; (c) increased investmentin foreign affiliates; and (d) joint ventures. Finally, commentatorshave noted that taxes may affect a decision as to the source of financingmore than decisions as to the level of investment. 17 Investors haveseveral alternatives on how to fund new ventures or expand existingoperations. Taxes likely play a role in the choice of whether to makea new equity investment, use internal or external borrowing or useretained earnings to finance investments.When the results of tax incentive regimes are examined seriously,there are successes and failures. 18 A good review of the resultsof incentives is set forth in a 1996 United Nations study. 19 The UnitedNations study concludes that “as other policy and non-policy conditionsconverge, the role of incentives becomes more important at themargin, especially for projects that are cost-oriented and mobile.” 20The OECD reaches a similar conclusion in finding that host countrytaxation affects investment flows and that it is an increasingly importantfactor in locational decisions. 2117Alan Auerbach, “The Cost of Capital and Investment in DevelopingCountries,” in Anwar Shah, ed., Fiscal Incentives for Investment and Innovation(Washington, D.C.: World Bank Group, 1995), Vol. 1.18See Ngee Choon Chia and John Whalley, “Patterns in InvestmentTax Incentives Among Developing Countries,” in Anwar Shah, ed., FiscalIncentives for Investment in Developing Countries (Washington, D.C.: WorldBank, 1992).19United Nations Conference on Trade and Development, Tax Incentivesand Foreign Direct Investment, supra note 3.20Ibid., 44-45.21W. Steven Clark, “Tax Incentives for Foreign Direct Investment:460