Rethinking Investment Incentives

The document examines the role of fiscal incentives in attracting foreign direct investment (FDI), arguing that tax exemptions cannot compensate for a weak investment climate. It critiques the use of blanket tax holidays, which can lead to tax avoidance and minimal domestic economic embedding. Instead, the author proposes a framework of 'timely, targeted and temporary' incentives, advocating for performance-based measures such as tax credits, accelerated depreciation, and green bonds. The paper suggests that governments should gradually move toward a uniform low corporate tax rate to create a level playing field for domestic and foreign investors while ensuring that incentives are administered through transparent tax codes rather than discretionary sector ministries.

• Tax incentives are ineffective at compensating for a poor investment climate; World Bank Group data from 2010 shows that lowering the effective tax rate from 40% to 20% increased FDI by only 1% of GDP for countries in the bottom half of investment climate rankings, compared to an 8% increase for those in the top half.
• Blanket tax holidays are described as 'blunt instruments' that often fail to encourage capital investment or domestic partnerships and can instead attract 'footloose investors' who leave once the holiday expires. They also facilitate tax avoidance through the creation of 'new' ventures and the use of transfer pricing to shift revenues to home states.
• The cost of creating jobs through investment incentives can be extremely high relative to wages; for example, in 2004, the cost per job created was 16 times the average annual industrial wage in Thailand, 18 times in Indonesia, and 33 times in Bangladesh.
• The author recommends that incentives be administered by tax authorities rather than sector ministries to increase transparency and reduce abuse, following the 'three Ts' principle: timely, targeted, and temporary.
• Performance-based incentives—including tax credits, investment allowances, accelerated depreciation, and green bonds—are proposed as superior alternatives to tax holidays. Examples include the Italian District of Apulia's program for energy efficiency and renewable energy, and New Mexico's use of bonds to finance energy efficiency in government and school buildings.
• While 'anchor investments' are often targeted with generous incentives to signal market stability, they can become 'enclaves' with few positive externalities if the domestic economy and labor force are too weak to support them.

APA

Perera, O. (2012). Rethinking Investment Incentives. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/rethinking_investment_incentives.pdf

Chicago

Perera, Oshani. Rethinking Investment Incentives. International Institute for Sustainable Development, 2012. https://www.iisd.org/system/files/publications/rethinking_investment_incentives.pdf.

Wikipedia

{{cite report |last1=Perera |first1=Oshani |title=Rethinking Investment Incentives |publisher=International Institute for Sustainable Development |date=September 2012 |url=https://www.iisd.org/system/files/publications/rethinking_investment_incentives.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{perera2012rethinking, author = {Perera, Oshani}, title = {{Rethinking Investment Incentives}}, institution = {International Institute for Sustainable Development}, year = {2012}, month = sep, url = {https://www.iisd.org/system/files/publications/rethinking_investment_incentives.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }