handbook-tb

Eric M. ZoltNew foreign direct investment may bring substantial benefits,some of which are not easily quantifiable. A well-targeted tax incentiveprogramme may be successful in attracting specific projectsor specific types of investors at reasonable costs compared with thebenefits received. The types of benefits from tax incentives for foreigninvestment follow the traditional list of benefits resulting from foreigndirect investment. These include increased capital transfers, transfersof know-how and technology, increased employment and assistance inimproving conditions in less-developed areas.Foreign direct investment (FDI) may generate substantial spillovereffects. For example, the choice of location for a large manufacturingfacility will not only result in increased investment and employmentin that facility, but also at firms that supply and distribute the productsfrom it. Economic growth will increase the spending power of thecountry’s residents that, in turn, will increase demand for new goodsand services. Increased investment may also increase government taxrevenue either directly from taxes paid by the investor (for example, afterthe expiration of the tax holiday period) or indirectly through increasedtax revenues received from employees, suppliers and consumers.This positive view of the benefits of foreign direct investmenthas recently been challenged by Yariv Brauner. 23 Like other scholars,Brauner questions whether tax incentives actually increase the level offoreign direct investment. However, Brauner goes further and challengeswhether foreign direct investment actually generates economic growththat is beneficial for development. Under this view, even if tax incentivessucceed in attracting new investment, it is not clear, with many types offoreign investments, that the developing country benefits.One can provide a general description of the types of benefitsof additional investment resulting from tax incentives. It is difficult,however, to estimate the benefits resulting from tax incentives withany degree of certainty. Sometimes the benefits are hard to quantify.Other times the benefit accrues to persons other than the firm receivingthe tax benefits.23Yariv Brauner, “The Future of Tax Incentives for Developing Countries,”in Yariv Brauner and Miranda Stewart, eds., Tax Law and Development(Cheltenham: Edward Elger Publishing, 2014).462