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The cost of capital and investment in developing countries

Author

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  • Auerbach, Alan

Abstract

The author's model can be used to evaluate how current and new policies affect incentives to invest in a developing country. The model takes into account factors that are often ignored in analyses of investment in more developed countries; such as risk, foreign tax provisions that affect capital flows, trade distortions, lack of domestic capital markets, and the relative credibility of government policy changes. The author reviews the literature on investment and capital costs, showing that the effects of tax and nontax government policies should be incorporated in any analysis of investment behavior. The following questions have been focused on : 1) for each dollar of forgone tax revenues, how much have tax incentives stimulated investment?; 2) do taxes affect foreign investment?; 3) how do taxes affect industrial production?; 4) how have tax instruments affected the use of labor?; 5) how have business taxes and tax expenditures affected technological change?; and 6) are these tax induced distortions preventing firms from holding optimal levels of fixed factors?

Suggested Citation

  • Auerbach, Alan, 1990. "The cost of capital and investment in developing countries," Policy Research Working Paper Series 410, The World Bank.
  • Handle: RePEc:wbk:wbrwps:410
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Claessens, Stijn, 1993. "Alternative Forms of External Finance: A Survey," World Bank Research Observer, World Bank Group, vol. 8(1), pages 91-117, January.
    2. Öner Günçavdi & Michael Bleaney & Andrew McKay, 1999. "The response of private investment to structural adjustment-a case study of Turkey," Journal of International Development, John Wiley & Sons, Ltd., vol. 11(2), pages 221-239.
    3. Leonardo Rhenals Rojas, 2005. "Costo de Uso del Capital en Colombia:1997 -2003," Macroeconomics 0502003, EconWPA.
    4. Gastanaga, Victor M. & Nugent, Jeffrey B. & Pashamova, Bistra, 1998. "Host Country Reforms and FDI Inflows: How Much Difference do they Make?," World Development, Elsevier, vol. 26(7), pages 1299-1314, July.
    5. van Wijnbergen, Sweder & Estache, Antonio, 1999. "Evaluating the minimum asset tax on corporations: an option pricing approach," Journal of Public Economics, Elsevier, pages 75-96.
    6. Shah, Anwar & Whalley, John, 1990. "An alternative view of tax incidence analysis for developing countries," Policy Research Working Paper Series 462, The World Bank.
    7. Shah, Anwar & Slemrod, Joel, 1990. "Tax sensitivity of foreign direct investment : an empirical assessment," Policy Research Working Paper Series 434, The World Bank.
    8. Boyer, Marcel & Cherkaoui, Mouna & Ghysels, Eric, 1997. "L’intégration des marchés émergents et la modélisation des rendements des actifs risqués," L'Actualité Economique, Société Canadienne de Science Economique, vol. 73(1), pages 311-330, mars-juin.
    9. Juan Perilla & Gabriel Piraquive, 2012. "La composición sectorial de la inversión y su implicaciones en la medición de los servicios del capital y el crecimiento en Colombia," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO, June.
    10. Zahir Shah & Qazi Masood Ahmed, 2002. "Measurement of Cost of Capital for Foreign Direct Investment in Pakistan: A Neoclassical Approach," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 41(4), pages 807-823.

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