Many countries turn to foreign direct investment simply because local savings are inadequate to support increased investment. Governments also expect foreign investors to provide technology, management skills and access to markets - in short, they are interested in the package of tangible and intangible assets embodied in foreign direct investment. The less developed a country is, the more severe are the domestic resource and capability constraints, and usually the greater are the expectations from foreign investment to alleviate them. 1
However, foreign investors are not attracted to locations with few advantages. Therefore, host countries adopt different measures in order to attract foreign investments. Among different measures such as providing a better built-up infrastructure, different incentives are frequently used by host countries. Therefore incentive measures also constitute one part of the national regulations in encouraging FDI. Thus by providing incentives, 2 the host country can attract more foreign investment and direct foreign investment into desired areas and industries.
As is indicated in the discussion of China's dilemma towards foreign investment, China has a great need of foreign capital, technology and management skills in order to develop its economy and realize its goal of the “four modernizations”. Therefore, China has established a comprehensive range of incentive policies in order to attract foreign direct investment.
Competition among countries to attract and keep foreign investment through incentives is strong and pervasive. Generally the most common incentive is the offer of tax holidays, for periods of five or more years, to new industrial undertakings. Sometimes investment incentives take the form of initial allowances or accelerated depreciation of the cost of buildings, plant and machinery for tax purposes. Moreover, any part of this allowance which cannot be deducted from profits or income of the year of assessment may be carried forward to subsequent years. Fiscal relief can also be given by fully or partially exempting building materials, plant and machinery and raw materials for new industries from customs duties.