Negative Effects of Tax Incentives Towards Foreign Direct Investment: a Hypothetical Report

4762 Words Nov 9th, 2011 20 Pages
Executive Summary
The tax incentive policy widespread around the globe in the 1990s due to the belief that attracting multinational firms would create more job opportunities and eventually better off for the whole economy. There have been some evidences that foreign direct investment (FDI) benefited developed countries’ economy. Recently, the Australian government has proposed a new policy that would give fairly large incentives to foreign direct investors. However whether the FDI would benefit Australia’s automobile industry and textile industry, is questionable, and needs to be critically evaluated.
This report has been written by the Manufacturers Association, and it is believed that there would be more disadvantages than advantages to
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Moreover, when the government implement the new program, administration cost will also be added, and for local small businesses, foreign direct investors are the biggest threat. Therefore, it is hard to judge whether the tax incentive program would benefit to the economy. To continue in response to the government’s recent proposal, although the manufacturers association somewhat agrees with the points, which states that depending on the incentive, there can be huge investments of foreign capital, and encourages long term planning, these advantages only applies to the new industry fields. Especially in terms of natural resources, tax incentives would allow foreign investors to purchase it without additional taxes, which would not be fair for domestic businesses that purchase raw materials with the full cost. Furthermore, since the foreign investors only seek for lower labour cost, when there is a better opportunity in terms of labour cost, then they are likely to relocate their investment. Therefore, depending on the foreign investment is highly risky, and may have more negative effects than positive effects on the economy.

Policy Effects
Tax cuts for foreign investors are not very influential in factors for selecting investment locations. It is not to say that tax incentives have no effect on foreign investment and can sometimes be the critical thing that brings foreign investment, after the consideration of things such as basic
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