Foreign Direct Investment with Tax Holidays and Policy Uncertainty

Abstract

We study foreign direct investment agreements that entitle firms to a lower tax rate during a tax holiday period. Our model considers both finite and uncertain tax holiday period settings. We show that the tax holiday duration may have, for small tax rate reductions, a nonmonotonic effect on the investment timing. For sufficiently high tax reductions, a longer tax holiday speeds up investment. A higher tax reduction during the tax holiday and a lower uncertainty are shown to have a monotonic effect on the threshold, hastening investment. However, in case of a finite tax holiday, for exceptional high salvage values, a higher uncer- tainty can speed up investment. We show the usefulness of our model to design an optimal incentives package that prompts investment.

Publication DOI: https://doi.org/10.1002/ijfe.1688
Divisions: Aston Business School > Economics, Finance & Entrepreneurship
Aston Business School
Additional Information: This is the peer reviewed version of the following article: Azevedo A, Pereira PJ, Rodrigues A. Foreign direct investment with tax holidays and policy uncertainty. Int J Fin Econ. 2018;1–13, which has been published in final form at https://doi.org/10.1002/ijfe.1688.  This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving. Funding: FCT. Grant Numbers: POCI-01-0145-FEDER-006683, POCI-01-0145-FEDER-006890; ERDF
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Related URLs: https://onlinel ... .1002/ijfe.1688 (Publisher URL)
PURE Output Type: Article
Published Date: 2019-04-01
Published Online Date: 2018-10-10
Accepted Date: 2018-09-09
Authors: Azevedo, Alcino ( 0000-0002-4751-6085)
Pereira, Paulo J.
Rodrigues, Artur

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