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Incentive Targeting, Influence Peddling, and Foreign Direct Investment

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  • Kelly D. Edmiston

  • Shannon Mudd

  • Neven T. Valev

Abstract

We expand the traditional tax incentive redundancy argument by investigating the implications of allocating incentives primarily to firms that would have invested even in the absence of special tax treatment. Incorporating government revenue constraints, pliable tax officials, endogenous tax liabilities, and firms with heterogeneous before-tax returns, we show that tax incentives, if given to the "wrong" firms, are not only ineffective in stimulating FDI, but result in a form of tax shifting and may reduce FDI. Data from countries of the former Eastern Bloc suggests that tax incentive schemes have significantly negative impacts on FDI in countries that poorly target firms.

Suggested Citation

  • Kelly D. Edmiston & Shannon Mudd & Neven T. Valev, 2004. "Incentive Targeting, Influence Peddling, and Foreign Direct Investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(5), pages 647-660, September.
    • Handle: RePEc:kap:itaxpf:v:11:y:2004:i:5:p:647-660
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    Cited by:

    1. Alvaro Cuervo-Cazurra & Bernardo Silva-Rêgo & Ariane Figueira, 2022. "Financial and fiscal incentives and inward foreign direct investment: When quality institutions substitute incentives," Journal of International Business Policy, Palgrave Macmillan, vol. 5(4), pages 417-443, December.
    2. Joseph Amuka & Fidelis Ezeudeka, 2017. "Tax Incentives and the Flow of Foreign Direct Investment to Non-Oil Sector: Empirical," Asian Journal of Social Sciences and Management Studies, Asian Online Journal Publishing Group, vol. 4(1), pages 57-64.

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