How Effective Are Fiscal Incentives to Attract Fdi to Sub-Saharan Africa?

By Cleeve, Emmanuel | The Journal of Developing Areas, Fall 2008 | Go to article overview

How Effective Are Fiscal Incentives to Attract Fdi to Sub-Saharan Africa?


Cleeve, Emmanuel, The Journal of Developing Areas


ABSTRACT

Given the role of foreign direct investment in the development process, one of the most important challenges facing Africa is how to attract foreign direct investment. A number of attempts have been made, but most have been unsuccessful because of various factors that work against the business environment for foreign investment. This paper analyses the impact of fiscal incentives, the most popular instrument, for attracting foreign investment to Sub-Saharan Africa. It uses cross-sectional time series data on 16 Sub-Saharan African countries, and an econometric model of three proxies of fiscal incentive, after controlling for traditional and other policy variables. The results show that traditional variables and government policies to attract foreign investment to Africa are important. Of the fiscal incentives, tax holidays seem to be the most significant. What could also be important are political and macroeconomic stability at the national and regional levels, property rights protection and other investment-supporting regulations and improvements in infrastructure and service support systems.

JEL Classifications: F21, F23, C4, O1

Keywords: Foreign Direct Investment, Fiscal incentives, Sub-Saharan Africa

Corresponding Author's Email Address: e.cleeve@mmu.ac.uk

INTRODUCTION

As early as the 1960s, Vernon and other economists recognized the importance of locational determinants in the foreign direct investment (FDI) decision making process, especially in the location of US firms in advanced developed countries (see Vernon 1966; Wells 1972). In the 1970s, however, attention was switched to the firm-specific characteristics of the investor, where attention was focused on the 'why' question; why firms choose to set up production facilities in a foreign location rather than exporting (see Caves 1982, 1996).

Since the 1970s, the emphasis on the ownership-advantages of firms has continued to drive academic debate and research on FDI, but recently there has been a renewed interest in the locational aspects of FDI, which complement the competitive ownership factors of firms and their modes of market entry (Dunning 1998). This approach takes into consideration "the relationship between trade and FDI, and the economic structure and dynamic comparative advantage of regions and countries" (ibid, p.46).

The rest of this paper is presented as follows. In section 2, we discuss the motives for undertaking FDI by multinational enterprises and for seeking FDI by less developed countries (LDCs). Section 3 analyses FDI performance and potential in sub-Saharan Africa (SSA). The incentive policies pursued by SSA to attract FDI are analyzed for appropriateness in section 4 and section 5 discusses the data sources and variable definitions. The results of the analysis are presented in section 6, and section 7 summarizes and concludes the paper.

THE MOTIVES FOR FDI

Orthodox economic theory of the firm which assumes a perfectly competitive market structure cannot be applied to FDI and the multinational enterprise (MNE). With perfect competition firms do not possess the market power on which the MNE thrives. For FDI to occur there must be some imperfections in markets for goods and for factors, or some interference in competition by government or by firms (Hymer 1960, Kindleberger, 1969). Thus market imperfections permit the MNE to acquire its ownership advantage and to exploit it through foreign production. Departures from perfect competition may occur in the goods market through product differentiation, brand names, and special marketing skills (Caves, 1971). In the factor markets, such departures may take the form of special managerial skills, differences in access to capital markets and patented technology. Existence of economies of scale (both internal and external) may cause imperfections in the market (Hirsch 1967). Finally, government policies in respect of interest rates, taxes and exchange rates may create imperfect markets (Aliber 1970). …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

How Effective Are Fiscal Incentives to Attract Fdi to Sub-Saharan Africa?
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.