Are FDI incentive programs a good investment for the host country?

Thaddeus J.S. Mallya, Zdenek Kukulka, Camilla Jensen

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This article discusses the relative merits of investment incentives
in the light of the current competition for foreign direct investment
among economies in transition. The case of the Czech National
Incentive Scheme is evaluated in terms of three major interrelated
issues: “crowding in” additional foreign direct investment, costbenefit
considerations and quality of investment. It may be hard
to meet by these criteria establishing ex ante conditions for
investors applying for incentives. The Czech scheme has “crowded
in”, at best, 10% more foreign direct investment than in a
hypothetical case of no incentives. The decisive question is really
whether the programme has succeeded in improving the quality
of investment. The findings of this article suggest that screening
rules as applied by the Government of the Czech Republic may
have been successful in this respect. However, as the scheme is
being scaled up, quantity targets start to threaten quality concerns.
A simple cost-benefit calculation suggests that, under a worstcase
scenario of maximum tax relief to foreign investors, the
absence of spillovers and capture of comparative advantages by
investors, the social price may be in excess of $40,000 per job
created. This price can be compensated only by such opportunity
costs as the burden of unemployment outlays, or losses due to
not attracting higher-quality foreign direct investment
TidsskriftTransnational Corporations
Udgave nummer1
Sider (fra-til)109-148
Antal sider40
StatusUdgivet - 1 jun. 2004
Udgivet eksterntJa