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Foreign direct investment with tax holidays and policy uncertainty
Author(s) -
Azevedo Alcino,
Pereira Paulo J.,
Rodrigues Artur
Publication year - 2019
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1688
Subject(s) - economics , tax credit , monetary economics , investment (military) , ad valorem tax , foreign direct investment , value added tax , indirect tax , tax reform , tax rate , microeconomics , international economics , public economics , macroeconomics , politics , political science , law
We study foreign direct investment agreements that entitle firms to a lower tax rate during a tax holiday period. Our model considers both finite and uncertain tax holiday period settings. We show that the tax holiday duration may have, for small tax rate reductions, a nonmonotonic effect on the investment timing. For sufficiently high tax reductions, a longer tax holiday speeds up investment. A higher tax reduction during the tax holiday and a lower uncertainty are shown to have a monotonic effect on the threshold, hastening investment. However, in case of a finite tax holiday, for exceptional high salvage values, a higher uncertainty can speed up investment. We show the usefulness of our model to design an optimal incentives package that prompts investment.