Foreign direct investment with tax holidays and policy uncertainty

• Autor(a) principal: Azevedo, Alcino
• Data de Publicação: 2019
• Outros Autores: Pereira, Paulo J., Rodrigues, Artur
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/1822/65727
• topic: FDI; Real options; Tax holidays; Taxation policy; Uncertainty; Ciências Sociais::Economia e Gestão; Social Sciences

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.