Incoming foreign investments

Ex. 6‑7 Motives to attract foreign inward investments

Keywords: motives, inward investments

The governments of countries are very happy about the creation of new and well-paid jobs, because it allows collecting more taxes related to the income of the population, and also increases the purchasing power of the population, which increases consumption in the country, which allows the collection of higher value-added taxes where those applied (Exhibit 6-7).

However, the positions of local businesses on this issue often conflict with the government’s aspirations, as local businesses often have to close or become part of the value chain of multinational companies, i.e. suppliers and subcontractors. Not all local businesses are able to transform in this manner (Asiedu et al., 2009). However, one of the most important questions is related to another tax – i.e. corporate tax or so-called profit tax. Governments generally want the profits of a foreign organization registered in their country to be accounted for and taxed in their country (Shukurov, 2016). However, international companies tend to look for ways to legally reduce profits without breaking the law and transfer them to the countries of the headquarters, where the corporate tax is usually very low. For example, many international companies, even the most famous social networks or airlines, have their headquarters in Ireland, or other so-called “tax haven” such as Cyprus, Panama or Virginia Islands.

FDI often means that a parent organization invests in or creates a subsidiary in another country. Such functions as marketing, public relations, process management, international supply are also outsourced from subsidiary organization from the parent company, which means that the expenses of the subsidiary are increased, and the profit is reduced.

From a legal point of view, these activities are not illegal, especially since international companies have the resources to hire the world’s most famous international law firms and international auditing companies to make all documentation compliant with the law. However, this case does not benefit the host country, as lower profit or corporate tax is payable in that country.

Since employment-related taxes are still paid in the host country, this partially offsets the loss or reduction in corporate tax collection. The fact that foreign investment creates competitive pressure on local businesses is not only negative. Production efficiency, technological and managerial abilities increase in local economies. Local businesses often adjust to the investor’s needs and become their suppliers. As a result, direct foreign investments can even change the structure of local industry, encourage the creation of new sectors, and encourage scientific institutions to train specialists in the relevant specialization.

In addition to becoming suppliers to international companies that have invested in their countries, local businesses can also establish horizontal cooperation relationships. Horizontal linkages occur when local firms benefit from foreign subsidiaries that operate in the global firm’s internal value chains, and technology spilled from the multinational becomes useful to local firms in the same industry (Zhang et al. 2010).

Inward investments