Attracting foreign capital Attracting foreign investment
Empirical studies suggest that a country's natural resources, its recent growth performance, and its political and economic stability are the factors that attract foreign investors. While governments offer foreign investors a wide variety a incentives such as tax holidays, tax concessions, accelerated depreciation allowances, duty-free imports of capital goods, investment subsidies and guarantees against expropriation, most such investors regard incentives as volatile and transitory.
Eight countries - Brazil, Mexico, Singapore, Indonesia, Malaysia, Argentina, Venezuela and Hong Kong - account for more than half the stock of foreign investment in developing countries. Many of these countries do offer tax concessions, but it is unlikely that in the absence of a favourable economic and political climate for investment, tax concessions alone would be enough.
Countries that follow outward-oriented strategies have fewer problems with foreign direct investment. Since they do not discriminate between import substitution and exports, they tend to attract foreign firms wishing to take advantage of their resources.
Controls matter more than incentives to foreign investors, who in developing countries are often subject to regulations and requirements that are more stringent than those faced by domestic investors. These regulations may require exclusion from some sectors, limits on foreign equity participation, domestic content minima, export obligations, employment quotas, establishment of research and development facilities, appointment of host-country nationals to senior managerial positions, ceilings on repatriation of profits and royal ties and limits to the duration of technology licensing agreements.
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