Increasing Agricultural Productivity:
Encouraging Foreign Direct Investments in the COMCEC Region
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 To correct for market failures in the provision of capital and risk-taking of companies;
and
 To change the image of a location to make it pro-business.
The more footloose and independent (i.e. locational freedom) a given business activity is with
regards to its location, the higher the impact of incentives in the decision-making. Conversely,
the higher the dependency on local resources and assets (raw materials but also specialized
suppliers, or research institutes) the smaller the impact of incentives. To give an example, it is
easier to engage in forestry than to find favourable locations for soybean cultivation.
Incentives are part of the overall business environment of a country or location. Incentives are
often (and should be) regarded as the ‘cherry on top’ or ‘icing on the cake’. Incentives are, in
most cases, not the key driver of an investment location decision by a company. Depending upon
the industry and type of business activities, companies explore multiple location drivers or
factors before they take a final decision on where to invest.
The use of tax incentives has increased in popularity among policy makers of developing and
emerging economies. Most countries face pressure to offer more generous tax incentives in
order to compete with tax incentives offered in neighbouring countries, while most
governments are also under pressure to cut budgets and divert tax revenues towards spending
on public goods and services. The justification of tax incentives conflicts with the key objective
of tax policies i.e. to generate tax revenues and income for a government.
Fiscal or other cost-reducing incentives tend to be effective where the investment decision is
among either:
 Similarly attractive platforms, which meet underlying project requirements, for
producing for export to other markets;
 Similarly attractive parts of one large market (such as USA, EU, China);
 New start-up projects which prefer incentives that reduce their initial expenses;
 Established, expanding firms that may prefer tax-related incentives that affect profit;
and
 All firms value transparent, easy to understand, and certainty in incentives policy.
However, under pressure from companies playing off locations to get the best offer,
governments feel that they have to offer incentives because their competitors do - simply to
ensure that they are in the game.
There are many forms of incentives and they can be categorized through various angles: ex-ante,
ex-post, fiscal (direct and indirect) or non-fiscal etc. Type of incentives are: tax holidays, tax
exemptions or reductions, withholding tax exemptions or reductions, depreciation allowances,
loans, job creation or training grants, R&D grants, operational rebates (infrastructure subsidies,
electricity rebates, cost sharing etc.), temporary wage subsidies, relocation or expatriation
support. Soft incentives can be qualified as investor facilitation support by investment
promotion agencies (IPAs) for instance through a One-Stop-Shop (OSS) or through