Democracy, Autocracy, and Tax Incentives to Foreign Direct Investors: A Cross-National Analysis

While offering tax incentives to attract foreign direct investment has become a global phenomenon and part of economic globalization in the 1990s, it also is political and controversial. But the political determinants of tax incentive policies have rarely been analyzed. This article fills this gap by making two contributions. First, I offer a theory that explains how political regime type influences tax incentive policy in the cross-national setting. Second, I evaluate the theory with a statistical analysis of 52 developing countries. The findings support my main theoretical expectations. Countries with better rule of law offer lower levels of tax incentives, and the effect is stronger for more democratic countries. In democracies, FDI inflows are negatively associated with the level of incentives. Autocratic regimes maintaining restrictions on foreign entry adopt lower levels of incentives than those without restrictions. I discuss the policy implications of these findings.