Foreign direct investment with tax holidays and policy uncertainty. (10th October 2018)

• Record Type: Journal Article
• Authors: Azevedo, Alcino; Pereira, Paulo J.; Rodrigues, Artur
• Is Part Of: International journal of finance & economics. Volume 24:Number 2(2019:Apr.)
• Page Start: 727
• Page End: 739
• Publication Date: 2018-10-10
• Subjects: FDI -- real options -- tax holidays -- taxation policy -- uncertainty; International finance -- Periodicals; Economics -- Periodicals; 332
• DOI: 10.1002/ijfe.1688
• Languages: English
• ISSNs: 1076-9307

Abstract

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 uncertainty can speed up investment. We show the usefulness of our model to design an optimal incentives package that prompts investment.