United nations of tax incentives

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III . 
Different types of tax competition
Tax incentives are all about tax competition—how can a country 
attract investment that otherwise would have gone to a different region 
or country? Countries may seek to compete for different types of 
investments, such as headquarters and service businesses, mobile light 
assembly plants or automobile manufacturing facilities. The starting 
point in thinking about tax competition is to consider the reasons why 
foreign investors invest in a particular country. At a highly stylized 
general level, there are three primary reasons to engage in cross-border 
investments: (a) to exploit natural resources; (b) to facilitate the selling 
or production of goods or services in a particular market; and (c) to 
take advantage of favourable conditions in a particular country (such 
as relatively low wages for qualified workers) to produce goods for 
export (either as finished products or as components). The competition 
for foreign investment will differ depending on the reason for the 
investment. For example, tax competition will exist among countries of 
a common customs union for the manufacturing or distribution facility 
that will service the entire region. In contrast, for export platforms, the 
competition will be among countries that have similar comparative 
advantages. As such, the competition for investment may be global, 
among countries in a particular region or even among States within a 
particular country. The key point is that the design and the effectiveness 
of tax incentives will differ depending on the type of investment.
IV . 
Additional investment incentives
Countries will compete for foreign investment using any means 
available to them. Non-tax incentives, such as training grants, 
10 
See Sebastian James, “Providing Incentives for Investment: Advice for Policy-
makers in Developing Countries”, Investment Climate in Practice, No. 7, World Bank 
Group (Washington, D.C., World Bank Group, 2010). He estimates that tax incentives 
in a country with a good investment climate may be eight times more effective in attract-
ing foreign investment than in countries with less favourable investment environments.

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