Fiscal Competition in Developing Countries : A Survey of the Theoretical and Empirical Literature
The last two decades have witnessed a sharp increase in foreign direct investment (FDI) flows and increased competition among developing countries to attract FDI, resulting in higher investment incentives offered by host governments and removal of restrictions on operations of foreign firms in their countries. Fiscal competition between governments can take the form of business tax rebates, productivity-enhancing public infrastructure or investment incentives such as tax holidays, accelerated depreciation allowances or loss carry-forward for income tax purposes. It can take place between governments of different countries or between local governments within the same country. This paper surveys the recent theoretical and empirical economic literature on decentralization which attempts to answer three questions. First, does theoretical literature on fiscal competition and "bidding races" contribute to a better understanding of such phenomenon in developing countries? Second, are FDI inflows in developing countries sensitive to fiscal incentives and is there empirical evidence of strategic behavior from the part of developing countries in order to attract FDI? Third, what evidence is there about fiscal competition among local governments in developing countries?
Summary: | The last two decades have witnessed a
sharp increase in foreign direct investment (FDI) flows and
increased competition among developing countries to attract
FDI, resulting in higher investment incentives offered by
host governments and removal of restrictions on operations
of foreign firms in their countries. Fiscal competition
between governments can take the form of business tax
rebates, productivity-enhancing public infrastructure or
investment incentives such as tax holidays, accelerated
depreciation allowances or loss carry-forward for income tax
purposes. It can take place between governments of different
countries or between local governments within the same
country. This paper surveys the recent theoretical and
empirical economic literature on decentralization which
attempts to answer three questions. First, does theoretical
literature on fiscal competition and "bidding
races" contribute to a better understanding of such
phenomenon in developing countries? Second, are FDI inflows
in developing countries sensitive to fiscal incentives and
is there empirical evidence of strategic behavior from the
part of developing countries in order to attract FDI? Third,
what evidence is there about fiscal competition among local
governments in developing countries? |
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