The Effectiveness of Tax Incentives in Attracting FDI: Evidence from the Tourism Sector in the Caribbean
AbstractWe investigate to what extend tax incentives have been effective in attracting Foreign Direct Investment in the tourism sector in the Caribbean in the period 1997-2007. More precisely, we test whether the neoclassical investment theory prediction that tax incentives, by lowering the user cost of capital, raise investment, holds in the Eastern Caribbean Currency Union (ECCU). We use differences in difference to assess the impact of an important change in tax incentives for tourism investment in Antigua and Barbuda in 2003. The other ECCU countries serve as excellent control group countries since the small islands share the same currency, coordinate macroeconomic policies to some extent, have similar geographical characteristics, and compete for the same big international tourism corporations. Accounting for other factors driving tourism FDI in this region, we find that tourism investment in Antigua and Barbuda after 2003 increased significantly more than investment in the other six ECCU countries due to the tourism tax incentives reform. This study is one of the first to assess the impact of sector specific tax incentives on investment in developing countries. Moreover, while previous studies relied on cross sectional differences, our differences in difference approach offers a cleaner way to identify the effect of the tax incentives policy.
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Bibliographic InfoPaper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 10/675.
Length: 32 pages
Date of creation: Sep 2010
Date of revision:
Find related papers by JEL classification:
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-06 (All new papers)
- NEP-PBE-2010-11-06 (Public Economics)
- NEP-PUB-2010-11-06 (Public Finance)
- NEP-TUR-2010-11-06 (Tourism Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Christopher L. House & Matthew D. Shapiro, 2008.
"Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation,"
American Economic Review,
American Economic Association, vol. 98(3), pages 737-68, June.
- Christopher House & Matthew D. Shapiro, 2006. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation," NBER Working Papers 12514, National Bureau of Economic Research, Inc.
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