Controlling Incentives and Maximizing the Value of Inward Investment

This chapter analyzes the ways that policymakers around the world have tried to control investment incentives and evaluate their success. As discussed earlier, a number of studies, such as that of Head, Ries, and Swenson (1999) and Albornoz and Corcos (2007), offer theoretical justification for multilateral control of incentives. Here we consider several real-life attempts in that direction. First, I will discuss the rules and effectiveness of the most comprehensive disciplinary effort, that of the European Union. This section begins with a general outline of rules, followed by the most important framework applying to investment incentives per se, the Multi-Sectoral Framework on Regional Aid for Large Investment Projects. As we will see, these comprehensive controls have achieved the most success in disciplining investment incentives and bidding wars, but they lack a complete ban on the use of relocation subsidies. The various rules in the GATT Uruguay Round agreements that affect subsidies, including the Agreement on Subsidies and Countervailing Measures (SCM), the General Agreement on Trade in Services (GATS), and the Agreement on Trade-Related Investment Measures (TRIMS), are then explained. These constitute a relatively blunt tool for controlling investment incentives, and the transparency provided by the reporting requirements of the Agreement on Subsidies and Countervailing Measures is far less than that achieved in the EU.