A network of developing country research institutes that examine trade policies has published two reports that highlight the impacts, negative and positive, of subsidies designed to attract investment.

A “Checklist for Assessing the Sustainable Development Impacts of Investment Incentives”, published by the Trade Knowledge Network, provides a set of questions for government officials and other stakeholders to consider when designing investment incentives, in order to better ensure that they contribute to economic development, as well as sustainable development more broadly.

The author of the checklist, Kenneth P. Thomas of the University of Missouri-St. Louis, notes that while certain investment incentives have been credited with attracting investments, others have left doubts as to whether the investment would have still been made in the absence of the incentives.

Indeed, those studies that have attempted to determine whether investment incentives have contributed to economic development leave some doubt. The report says that “even some of the more optimistic of these analyses estimate that less than ten per cent of apparent jobs were truly due to the effect of the incentive. Moreover, many times job creation in one jurisdiction is soon offset by job cuts at other facilities of the same company, or by cuts at other companies due to their succumbing to subsidized competition.”

The checklist is not the first of its kind, coming on the heels of the OECD’s 2003 “Checklist for Foreign Direct Investment Incentives”. However, unlike the OECD checklist, the TKN considers the impacts of investment incentives beyond economic effects, such as their impact on the environment.

In addition to the checklist, the TKN has recently published a study on investment incentives in Southeast Asia, a region where investment incentives are prevalent. While the region has seen a 15-fold increase in FDI over the last two decades, the degree to which investment incentives actually influence investment decisions is poorly understood, says the author, Heike Baumüller. How particular incentives impact the environment is even less well researched.

The report, “Competing for Business: Sustainable Development Impacts of Investment Incentives in Southeast Asia”, provides an overview of how foreign investment has contributed to development in the region, the various incentives that these countries offer, and the bilateral and regional rules that currently govern foreign investment. The report also sheds light on the regional dynamics with respect to competition for FDI, such as the influence that China’s rapid economic development has had on both encouraging and diminishing foreign investment in other countries in the region.

Baumüller and Thomas both draw attention to potential bidding wars within states (i.e., between municipalities or provinces) or between states, as a potential point of concern.

“Some have argued that competition for mobile capital can be healthy, facilitating the efficient allocation of investment and encouraging governments to improve the investment environment more generally,” writes Baumüller . “More commonly, however, concerns have been raised that competition can lead to ‘bidding wars’ that will leave all bidders no better or even worse off in the end.”