How do tax incentives affect the composition of Foreign Direct Investment (FDI) in north-east Asia

Abstract

The intense competitions among countries of using tax incentives to stimulate Foreign Direct Investment (FDI) suggest that an in-depth study of relationship between tax incentives and FDI is necessary. The early debates among tax incentives and FDI suggested that tax incentives did not have strong impact on FDI. However, those debates were far from over given the complexity of tax incentives and FDI. As a result of this, this study will focus on the relationship between tax incentives and FDI composition and analysis how tax incentives can affect the composition of FDI in different countries. The result indicates that tax incentives are only effective in affecting FDI composition in high-tech industries as well as capital-intensive sectors such as finance sector. Traditional industries such as agriculture industry are less sensitive to the availability of tax incentives. However, the limitation of this study is that data obtained from China and Indonesia government website was not comprehensive and reliable. In addition, a round-tripping activity was excluded to carry out this study.