The Spread of Investment Incentives to Developing Countries

Abstract

In contrast to the long-standing use of investment incentives in developed nations, the use of incentives in developing countries is, for the most part, a more recent phenomenon. Some see this as largely a defensive reaction to their use in the North (Oman, 2000; Mora et al., 2005), while another important driver is fiscal decentralization in countries such as Brazil, India, China (Markusen and Nesse, 2007) and Vietnam (Hong et al., 2009). In these decentralized countries, we see a number of cases of subnational competition for investment comparable to those in the US. As in the United States, there is very little regulation of this competition, even though in the Brazilian case the main incentive used by the states was technically illegal. Vietnam actually has made the greatest efforts to regulate subnational incentives, with differentiated aid maxima à la the European Union, but in 2005 newspaper reports revealed widespread violation of these maxima by provincial governments (Hong et al., 2009).