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Investment Incentives: Growing use, uncertain benefits, uneven controls

This report analyzes governments' use of investment incentives. These subsidies are designed to induce an investor to choose one location over another, affecting the location of an investment. They can thus be distinguished from production subsidies, which are not contingent on investment, but are instead based on normal production.

Investment incentives have been around for over 100 years. In 19th century America, cities offered money to railroads in order to have the railway pass through them (Sbragia, 1996). But it was only in the late 20th century that governments around the world began offering direct grants, tax breaks, training funds, free infrastructure and other inducements to attract corporate investment. While often thought of as a competition to attract foreign direct investment, competition is equally strong for domestic firms. The most intense competition and the largest subsidies are given to well-known multinational companies who make large investments. At the local level, incentives are often given to real-estate developers and retail projects in order to capture tax revenue that would otherwise go to another jurisdiction.