FISCAL INCENTIVES AND INVESTMENT : WITH SPECIAL REFERENCE TO ASEAN

Abstract

With the growing recognition of the importance of foreign direct investment (FDI) in the development process, coupled with the many perceived benefits such as the creation of external economies from inflows of modem technology and training facilities, entrepreneurship and managerial know-how, and export market access, developing countries everywhere are becoming more receptive to FDI and many are now actively seeking ways to increase inflows. Apparently, it is observed that governments of developing countries have been competing with one another for FDIs. It is thought that taxes can have a substantial impact on the rate of return of an investment, fiscal incentives of one form or another are used as arsenals to increase inflows. This led to fiscal incentive competition among the developing countries. This tax competition and changing trend is claimed to be nowhere more evident than in the Association of South-East Asian Nations (ASEAN) (Soon, 1990). The project focuses mainly on the evaluation of this new trend in the Asean member countries as well as its implications. Various government fiscal policies will be looked into, in particular, the fiscal incentives offered. However, attributed by the great difficulties in gathering data, Brunei is not included in this discussion. Indonesia is also omitted mainly because of its new tax legislation in 1984 which virtually repeals all special tax incentives. The project is divided into 6 chapters. Chapter 1 briefly introduces fiscal incentives, specially highlighting the most common fiscal incentives encountered in the ASEAN countries. Chapter 2 uses a theoretical framework i.e, the neoclassical model, to examine how each fiscal incentive may indirectly increase the inflow of investment by lowering the user cost of capital. Various empirical studies conducted by competent scholars in the developed and developing countries (using different approaches) are looked into so as to determine whether the actual economic impact of fiscal incentives is in line with the conceptual model. In the subsequent chapters, the entire discussion will be zeroed into the case of ASEAN. First and foremost, a review of the Asean literature is given. A further attempt is made to study the trend of fiscal incentives competition over a. time span of 33 years (1958 - 1991). Besides looking into the empirical studies of the ASEAN countries, the project also attempts to account for the empirical evidence. Chapter 4 analyses the implications of fiscal incentives attributed by the empirical findings. Certain issues will be discussed, in particular, the feasibility of the harmonization of the fiscal incentives competition among the ASEAN member countries. Despite many theoretical setbacks of survey studies, with limited resources coupled with the fact that many econometric studies have been done in the region, a survey is conducted to examine the impact of fiscal incentives on the investment decisions of firms in Singapore, with the hope of drawing certain conclusions from it. A detailed report of the survey and its findings is presented in Chapter 5. The project finally concludes with Chapter 6, highlighting the key findings of the whole discussion.