INVESTMENT INCENTIVES

The report analyzes the widespread use of investment incentives globally, arguing that while they are intended to drive economic growth, they often lead to inefficient capital allocation, increased income inequality, and potential environmental harm. It examines the 'Prisoners' Dilemma' of bidding wars between jurisdictions and evaluates various disciplinary frameworks, such as the European Union's state aid rules and WTO agreements, noting that independent monitoring is key to effective control.

• Investment incentives are pervasive globally, used by governments on every continent to attract new investment or retain existing facilities, though they are most prominent in industrialized nations.
• The use of incentives often creates a 'Prisoners' Dilemma' where jurisdictions match each other's offers, resulting in a transfer of income to firms without changing the overall market share of investment.
• There is significant evidence that investment incentives can lead to economic inefficiency by inducing production in locations that are not the most efficient or by replacing labour with capital.
• Investment incentives may exacerbate income inequality by transferring public revenue from average taxpayers to the owners of capital.
• The environmental impact of investment incentives is under-researched, but there are risks that they encourage the production of polluting industries or the development of projects in environmentally sensitive areas, such as flood plains.
• In the United States, there is evidence that investment incentives have contributed to a shift in the tax burden from mobile corporate taxpayers to less-mobile taxpayers.
• The effectiveness of incentives in actually determining the location of investment is debated; while some surveys suggest they are secondary to basic economic factors, quantitative studies and the behavior of multinational corporations suggest they are significant, especially when multiple locations are inherently profitable.
• Lack of transparency in incentive negotiations hinders democratic accountability and academic analysis, as deals are often conducted in secret or through site-location consultants.
• The European Union's state aid regime is the most comprehensive disciplinary framework, utilizing a system of prior notification and maximum aid intensities based on regional economic need to limit distortive competition.
• WTO rules on subsidies, specifically the Agreement on Subsidies and Countervailing Measures (SCM), provide a blunt tool for disciplining incentives as they are complaint-driven and rely on ex post notification.
• Sub-national agreements in Canada and Australia to ban 'poaching' (relocation subsidies) have seen some success, though enforcement remains a challenge without an independent monitoring body.
• In highly capital-intensive industries like semiconductor fabrication and automobiles, firms often refuse to invest unless substantial subsidies are provided.

APA

International Institute for Sustainable Development (2007). INVESTMENT INCENTIVES. https://www.iisd.org/system/files/publications/gsi_investment_incentives.pdf

Chicago

International Institute for Sustainable Development. INVESTMENT INCENTIVES. 2007. https://www.iisd.org/system/files/publications/gsi_investment_incentives.pdf.

Wikipedia

{{cite report |author=International Institute for Sustainable Development |title=INVESTMENT INCENTIVES |date=November 2007 |url=https://www.iisd.org/system/files/publications/gsi_investment_incentives.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{internationalinstituteforsustainabledevelopment2007investment, author = {{International Institute for Sustainable Development}}, title = {{INVESTMENT INCENTIVES}}, institution = {International Institute for Sustainable Development}, year = {2007}, month = nov, url = {https://www.iisd.org/system/files/publications/gsi_investment_incentives.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }