Investment Incentive

by Investing School on October 18, 2009

In attempting to lure companies to invest in a particular location (via opening offices, plants there etc), governments or corporations provide subsidies to attract investors. This is known as an investment incentive. An example would be a municipality giving a real estate tax break in order to attract a manufacturing company. Some governments will provide free real estate or even guaranteed loans to companies willing to open operations in a particularly high unemployment area.

In order to expand their tax base and attract viable companies, some municipalities or governments are willing to build bridges or pay for rail lines. Often competition between municipalities to attract manufacturers or developers can be beneficial to companies as each municipality raises the bar.

When governments question whether so called investment incentives are truly incentives or just subsidies that allow companies a competitive edge in the global market, a trade war can develop, with sanctions and tariffs being imposed. Investment incentives are given to attract investment or manufacturing activity in a specified local and are not subsidies for productivity.

Transparency is an issue in regard to investment incentives. The line between subsidy and an incentive can sometimes be very thin. Industrial countries push the incentive envelops and draw investment away from developing countries.

Domestically, governments are concerned that incentives are pulling manufacturing from one area to another without taking into consideration what adverse economic affect this could have on the locality when jobs are lost and businesses lose their customer base.

Globally, there is very little regulation imposed on investment incentives. This lack of regulation directly affects investment in developing countries.

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