Offers practical evidence to help developing country policy makers design and implement more effective incentives to attract foreign direct investment (FDI). Tax incentive regimes in developing countries often suffer from weak design, lack of transparency, and cumbersome administration, which can diminish the attractiveness of incentives and raise their indirect costs in terms of economic distortions and potential for corruption. Tax incentives tend to attract efficiency-seeking FDI motivated by lowering production costs than other types of investment. Tax incentives impose significant costs on the countries using them, including fiscal losses, rent-seeking, tax planning and evasion, administrative costs, economic distortions, and retaliation. Developing country governments can take unilateral steps to use tax incentives in a more targeted and cost-efficient manner by (1) targeting incentives at those investors whose decision to invest is most likely swayed by incentives and (2) improving the design, transparency, and administration of incentives to reduce indirect costs and avoid unintended consequences.
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