Determinants of Regional Investment Decisions in China: An Econometric Model of Tax Incentive Policy

Determinants of Regional Investment Decisions in China: An Econometric Model of Tax Incentive Policy This paper examines whether concessionary tax rates and tax incentives can attract foreign direct investment (FDI) into certain designated areas in China. Since China opened its doors to foreign investors in 1979, tax benefits have been used extensively to attract FDI into different areas. In 1991, a new tax law was introduced which superseded two previous income tax laws. This new law provides additional tax benefits which improve the investment environment for foreign investors. This study investigates the effect of China's tax rates and tax incentive policy on FDI and on the locational choices of foreign firms. Our empirical results indicate that tax rates and incentives are important determinants of regional investment decisions in China, after controlling for potential confounding variables covering infrastructure, unemployment rate, wage rate and agglomeration economics. Specifically, areas offering lower tax rates and increased tax incentives are found to attract greater amounts of FDI. The impetus of the tax effect on FDI is more apparent in the post-1991 period due to changes in the tax laws. Our results also suggest that infrastructure variables are important determinants of regional investment decisions. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Determinants of Regional Investment Decisions in China: An Econometric Model of Tax Incentive Policy

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2001 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1017925721627
Publisher site
See Article on Publisher Site

Abstract

This paper examines whether concessionary tax rates and tax incentives can attract foreign direct investment (FDI) into certain designated areas in China. Since China opened its doors to foreign investors in 1979, tax benefits have been used extensively to attract FDI into different areas. In 1991, a new tax law was introduced which superseded two previous income tax laws. This new law provides additional tax benefits which improve the investment environment for foreign investors. This study investigates the effect of China's tax rates and tax incentive policy on FDI and on the locational choices of foreign firms. Our empirical results indicate that tax rates and incentives are important determinants of regional investment decisions in China, after controlling for potential confounding variables covering infrastructure, unemployment rate, wage rate and agglomeration economics. Specifically, areas offering lower tax rates and increased tax incentives are found to attract greater amounts of FDI. The impetus of the tax effect on FDI is more apparent in the post-1991 period due to changes in the tax laws. Our results also suggest that infrastructure variables are important determinants of regional investment decisions.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 3, 2004

References

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