Attract investment with reform, not subsidy

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In tomorrow's Financial Times, Nathan Jensen argues that cutting corporate taxes is not effective in attracting FDI. Countries should instead focus on improving their investment climate:

Politicians around the world are reducing corporate taxes in the hopes of attracting the investment of multinational companies... These policies waste scarce resources, generate few jobs and distract governments and voters from the real reforms necessary for development...

Tax policies have a negligible impact on multinationals’ decisions when political issues such as the security of private property, the effectiveness of the judiciary and the ability to uphold and enforce contracts rest on uncertain ground. It is these non-economic factors, not fiscal policy, that are fundamental in explaining the lack of investment in many developing countries… In developing countries, political reforms that provide a more business-friendly climate will have a much larger impact on attracting investment than cutting corporate tax burdens. Focusing on taxes distracts countries from making serious policy reforms.

Chapter 1 of Jensen's new book, Nation-States and the Multinational Corporation: A Political Economy of Foreign Direct Investment, is available online.

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