On a basic level, an investment incentive is precisely what it sounds like: a government-implemented policy that is designed to encourage and empower investors to work in a particular market, or to promote expansion into a new territory or region. The goals behind these moves are often very simple, in that they’re designed to create an environment where foreign businesses can both operate profitability and decrease the types of risks normally associated with expansion at the same time. For decades, this has been a popular and effective way for developing countries in particular to attract foreign investment—and international businesses may benefit from investment incentives in a number of ways.
The Power of International Investment Incentives
The most important thing for businesses to understand about these investment incentives is that they are very much a two-way street; governments all over the world aren’t offering them out of benevolence. The logic is that by expanding into a particular country, businesses will eventually put more into the local economy than was offered initially.
The key benefit to businesses is that these incentives make certain areas far more attractive when compared to other potential investment destinations, particularly as far as initial setup costs and long-term risks are concerned. If businesses have shortlisted a few countries for global expansion, then taking a look at which investment incentives are offered is a great way to further narrow that list.
Examples of the types of international investment incentives that businesses often take advantage of include, but are not limited to:
- Financial incentives such as grants and loans
- Reduced, exempted, or significantly deferred taxes or duties
- Infrastructure development guarantees
- Some type of preferred or otherwise preferential treatment in the domestic market
- Significantly reduced regulatory requirements
These incentives can be offered not only by local governments, but also cities, provinces, or international organizations. The type of incentive depends on the region into which the business is expanding, and how much activity it’s expected to generate as a result of these incentives.
Generally speaking, fiscal incentives are the most commonly used, especially if a business is expanding into a developing country. These areas often have limited resources to devote to large-scale financial incentives. To make up for this, they offer perks like reduced taxes instead of grants or loans. Again, this still allows the business in question to come out ahead; the company may not receive any money upfront, but they may actually make more in the long-term through reduced costs.
“…but What’s In It for Them?”
While it’s true that investment incentives can often be broadly available, they are usually targeted to a particular industry, region, or type of capital expenditure. This is often done as a way to attract more of certain types of businesses to a country, like those that operate in the technology sector, or those that will be setting up significant manufacturing operations.
Likewise, incentives may be offered by a government in an effort to increase investment in a certain region. They can even be offered to attract advanced capital that is not typically available in the host country. This may include overhauling their own transportation infrastructure by way of foreign investment or bringing modern tech companies into the fold.
But perhaps the most important thing for businesses to keep in mind is that many developing and developed countries offer Free Trade Zones, or other special economic areas in which a variety of these investment incentives are widely available. If you know that your business will soon be expanding into a number of new territories, these incentives can accelerate your own timetable to profitability while also giving a major boost to local economies. It truly is a situation where, when things are approached from the right angle, it helps to create a mutually beneficial situation for all parties involved.
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