Designing Effective Incentives for FDI

Voice of the Practitioner

Tax incentives are not uniform in their appeal – startups tend to favor programs in which initial costs can be reduced through incentive programs, whereas more established firms will be more attracted to programs that protect their profit margins.
Rolfe et al., 1993
Source: Determinants of FDI Incentive Preferences of MNEs


Business incentives are public subsidies, including tax abatement and financial assistance programs, designed to create, retain or lure businesses to an area to create economic prosperity and new jobs. Offering targeted incentives to businesses or industries can be a catalyst to attract foreign direct investment.

Regional leaders generally believe that a community without incentives will have a difficult time competing for FDI. However, there is ample evidence that other factors can be as or more important, such as the area’s business climate, regional economic circumstances, workforce availability, and overall “fit” with the region’s culture, priorities, ecosystem, and related considerations.

With proper safeguards in place, the right mix of incentives can help achieve a region’s economic and social goals.

While incentives are a useful tool for attracting FDI, they alone cannot seal the deal. Foreign investors weigh many other factors before deciding to establish, expand, or relocate business operations.  In the initial stages of the location decision process, incentive programs are used more for marketing purposes to demonstrate a commitment to growing relevant industries.  In the latter stages of the investment decision process, incentives provide the community with a way to offset cost or other competitive disadvantages.  The goal is to tip the decision in the community’s favor.

Before a potential FDI deal presents itself, regional leaders should agree on pre-determined benchmarks for either a minimum or an optimal desired benefit from an offered incentive.  This benchmark might be in the form of a public return on the incentive investment (i.e., What is the ratio of (1) economic benefit expected per dollar of public investment or (2) anticipated fiscal benefits per dollar of public investment?).

Potential Activities

  • Define objectives and clarify metrics needed to determine return on investment
  • Identify conditions under which regions might waive these policies to create flexibility to respond to opportunities
  • Document consensus philosophy in a policy document shared with all partners (and prospects where appropriate)


Greencore’s Move to Quonset

When Greencore USA, a food processing subsidiary of Dublin, Ireland-based Greencore Group, sought to replace two aging facilities in Massachusetts, they opted for the Quonset Business Park (Rhode Island) for a couple of key reasons.  First, the state’s incentivized lease program helped to reduce costs, and second, the site-readiness program helped to reduce the time required to get the facility operational after the move, which was a top priority., 2014


Checklists and Guides

Tim Bartik, Local Economic Development Policies (2003). This publication (pp. 18-19) includes a useful list of suggestions for designing more effective incentives.

Georgia Institute of Technology, Best Practices in Foreign Direct Investment and Exporting Based on Regional Industry Clusters (2013), pp. 84-85. This document provides commentary on the role of incentives in its numerous examples throughout as well as a short discussion of designing incentives for different types of target investors.

Pew Charitable Trusts, Strategies to Reduce Budget Risk (2015). This document (pp. 12-16) offers strategies for governments to mitigate financial risk in awarding tax incentive programs.

Pew Charitable Trusts, How States Are Improving Tax Incentives for Jobs and Growth (2017). This document (pp. 15-19) provides criteria for states to recognize effective evaluation of tax incentive programs.

Eric Zolt, Michael Schill, Tax Incentives and Tax Base Protection Issues (2013). This publication (pp. 9-24) includes important considerations in designing, granting, and monitoring the use of tax incentives to increase investment and growth.

United Nations Conference on Trade and Development, Tax Incentives and Foreign Direct Investment: A Global Survey (2000). This document includes (pp. 11-32) a useful discussion of issues and trends in tax incentives, including designing effective incentives.

Practitioner Tip: Focus incentives on “target industries.” Regions can structure incentives offered to reflect the priority industry targets of the region (FDI-targeted industry sectors or clusters).  Foreign investors may value certain types of incentives — such as customized training, business start-up services, assistance in accessing trusted suppliers, or ready-to-go sites — more than others.  Providing incentives for investments in priority industries means that regions can focus their resources on making investments likely to have the greatest impact.