OECD Study Looks at National and
International Effects of Incentives

Are national and international "welfare" helped or hurt by economic development incentives? This was the focus of a newly released OECD study. The study looked at incentive use in both developing and developed nations.

The study concludes that competition among governments to attract foreign direct investment (FDI) has grown significantly, and that the intensity of this rivalry is a significant factor increasing the size of incentive packages given to businesses. The study finds that over-bidding; that is giving larger incentive packages than is need is particularly a problem in developing countries. The risk of “overbidding” is exacerbated by institutional weaknesses, poor cost-benefit analysis and in some cases, corruption. Moreover, the potential consequences of excessively generous incentives might be increased in those developing nations whose fiscal positions are already weak.

What solutions are proposed by the study principals? They say that the focus of international policy action should be to reduce the negative effects of incentive bidding wars, without prohibiting governments from pursuing legitimate industry, technology or regional-development policy objectives.

Efforts to increase the transparency of incentive deals offer promising results. At a national level, proper accounting could discourage firms from seeking greater incentives than they really need. Better accounting procedures could also assist governments to ensure that incentive expenditure is proportionate to the benefits of projects attracted by it. Where incentives are involved in international competition for business investments, greater information-sharing across national borders could increase the bargaining power of governments in incentive negotiations.

Go here to read more about the OECD study results.