Investment incentives in OECD member countries vary in terms of their scope, targets, conditions, and policy objectives. To explore these issues, this chapter first defines the concept of investment incentives, introduces the OECD typology of incentives and discusses the rationale behind investment incentives through a brief literature review. It then examines the objectives and use of investment incentives across OECD IPAs drawing on data from the 2024 OECD Survey on Investment Promotion and Investment Incentives. The chapter further analyses the design of investment incentives, including stakeholder consultations, the role of international benchmarking, and approaches for determining financial benefits and their scope. Finally, it concludes with an overview of sectoral targeting in investment incentives.
The Role of Incentives in Investment Promotion
Abstract
Governments in OECD member countries use a range of tax and non-tax incentives as part of their investment attraction strategies. These incentives are tailored to specific industries, regions, and investment types, to attract FDI and achieve various policy objectives.
While there is no universally agreed definition of investment incentives, they are commonly understood as any form of specific advantage provided to certain investors or investment projects beyond what is available to all firms or projects in a jurisdiction (Celani, Dressler and Wermelinger, 2022[2]). Investment incentives are a key component of OECD governments’ strategies for attracting investment. According to the OECD Survey on Investment Promotion and Investment Incentives (Box 1.1), all 35 participating IPAs highlight that their jurisdictions provide at least one investment incentive to promote or retain investment, reflecting that offering investment incentives is a widespread practice across OECD countries. Governments promote investment through a variety of policy instruments that they have at their disposal. However, investment incentives are not homogeneous in their policy objectives, in their scope or in the instruments used and include a broad variety of incentive instruments and design provisions (Celani, Dressler and Wermelinger, 2022[2]). They can take many forms, including tax, financial, regulatory, and in-kind incentives (Table 1.1).
Source: Based on OECD (2023[3]), “Improving transparency of incentives for investment facilitation”, OECD Business and Finance Policy Papers, No. 35, OECD Publishing, Paris, https://doi.org/10.1787/bf84ff64-en.
In 2024, the OECD IPA Network is exploring various facets of investment incentives. It aims to offer a comparative overview of trends and practices across OECD member countries. For this purpose, a questionnaire was developed to collect data on the types, scopes and targets of incentives offered, their alignment with broader investment promotion and development objectives, and the governance and monitoring mechanisms used. The database does not capture an exhaustive list of existing incentives deployed by each jurisdiction, but rather provides an overview of trends and practices. It aims to provide a clearer understanding of how different incentives function within the broader context of investment promotion and facilitation.
The survey was shared with IPA representatives from OECD countries in the form of an online questionnaire, which was completed between June and July 2024 with a participation of all OECD countries that have a national IPA. The dataset includes national IPAs from the following 35 countries: Australia, Austria, Canada, Chile, Colombia, Costa Rica, Czechia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, the Netherlands, New Zealand, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Türkiye, the United Kingdom, and the United States.
Note: Belgium, Israel, and Mexico are not represented in this analysis because they do not have a national IPA. For Italy, the responding institution was InvItalia, which is the national agency for inward investment and economic development, rather than ITA - Invest in Italy, a department of the Italian Trade Agency, which is more commonly known as the IPA.
Although prevalent among OECD countries, investment incentives represent only one element of a broader set of factors influencing investor decisions. Multinational enterprises (MNEs) often prioritise factors such as governance reforms, development of local suppliers, and investments in domestic infrastructure and human capital (James, 2013[4]; Danzman and Slaski, 2021[5]). Surveys, like those conducted by the World Bank on investment climate, consistently show that investors do not view incentives as decisive factors in their investment decisions (Tuomi, 2012[6]; World Bank Group, 2018[7]). Still, incentives often serve as a tiebreaker in the final stages of negotiations between investors and governments of shortlisted investment locations (Andersen, Kett and von Uexkull, 2018[8]). Therefore, governments may view incentives as necessary to compete with other countries to remain attractive given the global mobility of FDI (Tuomi, 2012[6]; James, 2013[4]).
Governments generally justify the use of investment incentives due to information asymmetries between investors and host governments (Harding and Javorcik, 2012[9]), as well as to compensate deficiencies in the investment climate (James, 2013[4]; Havránek and Iršová, 2010[10]). However, the efficacy and efficiency of these incentives remain contested. Research suggests that a significant proportion of firms benefiting from these incentives would have invested even without them, indicating potential inefficiencies. Tax incentives can also lead to substantial revenue losses for governments (OECD, 2021[11]). James (2013[4]) provides evidence that, in developing countries, 58–98% of firms that received incentives across different jurisdictions would have invested without being offered these tax breaks, reflecting that other factors such as improving the investment climate could be more effective in attracting investment.
On the contrary, some empirical evidence suggests that the effectiveness of investment incentives in attracting inward FDI depends on several factors, including the design features of incentives, characteristics of the investor, the nature of the investment, and the local context. For instance, efficiency-seeking FDI, which aims to reduce costs by optimising production for the global market, tends to be more responsive to tax incentives compared to resource-seeking or market-seeking FDI (James, 2013[4]).
Regarding design features, ex-post evidence shows that expenditure-based tax incentives, like accelerated depreciation have proven effective in stimulating investment in OECD countries such as the United Kingdom and the United States (Maffini, Xing and Devereux, 2019[12]; Zwick and Mahon, 2017[13]). Similarly, studies have found that expenditure-based tax incentives for research and development (R&D) can effectively induce investment in OECD countries. For example, in the United Kingdom, R&D spending among eligible companies increased by an average of 33% in response to tax incentives implemented in 2008 (Guceri and Liu, 2019[14]). Sungur (2019[15]) demonstrated that Türkiye's New Investment Incentive System, implemented in 2012 to promote investment in less developed regions through various schemes and support measures, successfully increased investment in those areas.
Another stream of literature has shown that the effectiveness of investment incentives can vary depending on local context. For example, accelerated tax incentives, like depreciation of capital expenditures in Poland, have produced mixed results. During periods of stability, Guceri and Albinowski (2021[16]) findings demonstrate that companies in Poland responded strongly with a positive investment response, while during a period of high uncertainty incentives did not prove very effective in stimulating investment for enterprises facing difficulties. Other authors have assessed that concurrent incentives of different types can have varying effects on FDI inflows. For instance, research by Bobenič Hintošová, Sudzina and Barlašová (2021[17]) found that financial incentives had a positive and statistically significant direct effect on FDI inflows in the Slovak Republic between 2002 and 2019. Tax incentives had a statistically significant negative impact on inward FDI during the same period, however.
Additionally, empirical studies of investment incentives often struggle to accurately assess their impact, potentially overestimating or underestimating their effects. Some of the empirical work assessing investment incentives’ effectiveness face challenges in isolating the precise effect of incentives amidst concurrent reforms aimed at enhancing the business environment. Countries often pursue growth-related reforms through a blend of approaches, including macroeconomic policies, improvements to the investment climate, and changes in industrial policies (Tuomi, 2012[6]).
The prevalence of investment incentives in OECD countries may be influenced by the fierce competition for FDI putting MNEs in a stronger position to request and negotiate incentives and the pressure felt by IPAs to secure investment projects in their jurisdictions. In this context, the OECD is seeking to enhance the design, governance, evaluation, and monitoring of incentives to maximise their benefits, providing policymakers and investment promotion practitioners with evidence-based guidance and tools to improve the effectiveness of these policies (Box 1.2).
The OECD’s multi-year work programme on investment tax incentives is co-ordinated by the Investment Division and the Centre for Tax Policy and Administration's Tax Policy and Statistics Division. It aims to improve the understanding of challenges and opportunities that investment tax incentives pose for advancing sustainable development. The programme focuses on enhancing the design, governance, evaluation, and monitoring of incentives to maximise their benefits and encourage reform of wasteful incentives. It also examines the impact of the Global Minimum Tax (GMT) on tax incentive policies and investment promotion strategies.
The first phase of the programme included developing the OECD Investment Tax Incentives Database, which covers detailed information on the design and governance of tax incentives across 70 developing countries. Additionally, the programme extended the OECD's corporate effective tax rates (ETRs) model to create comparable indicators of tax incentive generosity and conducted country- and regional-level assessments on incentive use and policy goals.
Phase 2 will provide a practical guide to tax incentive policymaking in low- and middle-income countries and will focus on further implementing the OECD Council Recommendation on FDI Qualities for Sustainable Development, adopted in June 2022. This recommendation encourages prioritising sustainable development objectives when providing financial and technical support to stimulate investment. It calls for assessing how financial and technical support can address market failures failures hampering sustainable development and thereby help attract sustainable investment and improve firm capabilities, job quality, and workforce skills. Moreover, it stresses the importance of transparency and regular reviews of financial and technical support.
Sources: Celani, Dressler and Wermelinger (2022[2]), “Building an Investment Tax Incentives database: Methodology and initial findings for 36 developing countries”, OECD Working Papers on International Investment, No. 2022/01, OECD Publishing, Paris, https://doi.org/10.1787/62e075a9-en; OECD (2022[1]); OECD Investment Tax Incentives Database – 2022 Update: Tax incentives for sustainable development” (brochure), OECD, Paris, www.oecd.org/investment/investment-policy/oecdinvestment-tax-incentives-database-2022-update-brochure.pdf; Celani, Dressler and Hanappi (2022[18]), “Assessing tax relief from targeted investment tax incentives through corporate effective tax rates: Methodology and initial findings for seven Sub-Saharan African countries”, OECD Taxation Working Papers, No. 58, OECD Publishing, Paris, https://doi.org/10.1787/3eaddf88-en; OECD (2022[19]), “Recommendation of the Council on Foreign Direct Investment Qualities for Sustainable Development”, OECD Legal Instruments, OECD/LEGAL/0476, OECD, Paris, https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0476.
1.2.1. Investment incentives serve as a versatile tool for achieving diverse policy goals
FDI can play a crucial role in making progress towards the achievement of the Sustainable Development Goals (SDGs). By operating in host economies, foreign firms contribute to multiple SDGs through various channels (OECD, 2022[20]). These include fostering innovation through linkages with local firms, creating quality jobs, developing human capital, and deploying sustainable technologies to address climate change. Foreign firms can also play a pivotal role in promoting gender equality through inclusive workplace practices. Similarly, FDI attraction can help advance efforts to address climate change, particularly by attracting environmentally friendly industries and technologies (Aust, Morais and Pinto, 2020[21]).Foreign firms can also generate broader economic benefits beyond their direct operations. By interacting with local businesses, competing in the market, and exchanging workers, they can spur innovation, job growth, and better environmental and labour practices (OECD, 2022[20]).
Given the potential of FDI to contribute to economic, social and environmental objectives, investment incentives are often designed to align with these broader policy goals. The OECD survey findings indicate a strong focus on enhancing productivity and innovation, particularly in line with SDGs 8 (economic growth) and 9 (industry and innovation), with 74% of countries prioritising this policy goal when designing investment incentives (Figure 1.1). Additionally, employment creation and regional development are key objectives for almost half of countries, consistent with established evidence on the potential of FDI spillovers to reduce inequalities within countries and improve job quality (Echandi, Krajcovicova and Qiang, 2015[22]; OECD, 2022[20]). Survey results indicate that incentives are designed without specific policy goals beyond facilitating investment in the majority of countries (57%).
While productivity, innovation, employment and job creation remain core objectives behind the design of investment incentives across OECD countries, other SDG areas seem to be less critical. As such, less than a third of OECD countries use incentives to support climate change objectives according to IPAs. Digital transformation is even less prominent, with only 17% of countries using incentives to support it, despite the potential for FDI to deploy new technologies that advance decarbonisation and digitalisation (OECD, 2022[20]). Gender equality, social inclusion, and export promotion are not considered as primary objectives behind investment incentives. Although supporting the green and digital transitions are not reported as top policy objectives, many OECD countries do still offer a range of incentives to attract FDI for sectors that can support these goals, such as renewables, battery plants, electric vehicles and semiconductors (see section 1.4). This may reflect the fact that these sector-specific incentives aim rather at achieving broader economic goals, including productivity growth and job creation, rather than climate and digitalisation objectives.
Top three policy objectives behind investment incentives (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
1.2.2. Tax incentives are the most common type of investment incentive, surpassing non-tax incentives in terms of prevalence
According to surveyed IPAs, tax incentives are the most frequently used type of incentive across OECD countries, with 97% offering them, with Luxembourg being the exception. Financial incentives, such as direct loans and grants, are also widely utilised, with 86% of countries providing them, although they remain secondary to tax incentives. Regulatory and in-kind incentives, such as the provision of land or infrastructure, are less common in OECD countries, employed by 49% and 31% of countries, respectively. While tax incentives dominate the landscape, survey results confirm that all OECD countries implement more than one type of incentive, underscoring the complementary or even overlapping nature of financial, regulatory, and in-kind tools alongside tax incentives (Table 1.2).
OECD economies with at least one investment incentive, by type (as reported by IPAs)
Note: Coloured cells indicate the presence of at least one incentive of this type.
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
Some OECD countries offer less conventional types of incentives to attract investments into specific sectors and locations. These include financial incentives such as direct equity investment and social security contribution incentives, as well as non-financial support like incubation programmes, employment assistance and streamlined administrative procedures. Examples of the latter include Korea's “red carpet” service for foreign investors and the Active Investor Plus Visa programme offered by New Zealand.
According to survey results, a significant majority (86%) of OECD jurisdictions use CIT incentives to reduce the tax burden on corporate profits, aiming to stimulate business activity (Figure 1.2.A). In countries using CIT incentives, expenditure-based incentives (tax credits and allowances)1 are more commonly employed than income-based incentives (reduced rates and exemptions), with 60% using tax credits and 51% using tax allowances (Figure 1.2.B). Expenditure-based incentives are often considered by experts as more effective than exemptions because they more effectively target marginal investment projects as they are tied to investment expenditures, ensure benefits reach qualifying entities, and provide clearer tracking of incentive usage (Dama, Rota-Graziosi and Sawadogo, 2024[23]) (IMF, OECD, UN, World Bank, 2015[24]).
Share of countries with at least one tax incentive (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
Besides the strong preference for CIT incentives, OECD countries also tend to favour incentives for direct taxes over indirect taxes. According to respondents, incentives for property taxes and those for social security contributions are available in 35% of OECD jurisdictions, in both cases (Figure 1.2.A). Lowering property taxes can potentially stimulate investment in real estate development and infrastructure projects, particularly for greenfield FDI. Meanwhile, incentives on social security contributions can influence investment decisions, especially in labour-intensive sectors (Zhang, Chen and Song, 2022[25]; Kobayashi and Daigo, 2016[26]). Less than a third of respondents (29%) mentioned the availability of incentives for payroll taxes in their jurisdictions and 21% noted the existence of incentives for taxes on goods and services that can reduce the costs of investors’ input.
Non-tax incentives, particularly direct grants, as well as loans and guarantees, are prominently deployed in the OECD, with approximately three out of four countries surveyed using them (Figure 1.3). Consistent with literature findings, financial incentives can play a significant role, especially in developed countries. Governments adopt financial incentives to support firms that may face credit constraints, hindering their ability to undertake investments even when profitable (Johnson and Toledano, 2022[27]). Financial incentives can also be particularly effective in attracting greenfield projects in countries with robust institutions, whereas tax incentives are more effective in countries with weaker institutional frameworks (Cuervo-Cazurra, Silva-Rêgo and Figueira, 2022[28]).
Share of countries with at least one non-tax incentive (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
In countries with strong institutions, stability and lower risks make direct financial support (like grants) more appealing, as investors can plan confidently. Conversely, in weaker institutional settings, tax incentives become crucial, as they may help offset higher risks and potential costs, improving long-term profitability and making investments more viable (Cuervo-Cazurra, Silva-Rêgo and Figueira, 2022[28]). The literature suggests also that the preference for financial incentives, such as direct grants, over tax incentives can depend on the type of activity and the investor. For instance, R&D grants might be more suitable for investors involved in fundamental or applied research, while R&D tax incentives typically encourage experimental development (OECD, 2020[29]). Financial incentives can also be particularly beneficial for investors in loss positions or those facing financing constraints, as they provide immediate support rather than deferred benefits (Hintošová and Barlašová, 2021[30]).
A variety of non-financial incentives are also offered by governments, though to a lesser extent compared to financial ones such as grants and loans. Specialised administrative assistance and services are used by 43% of OECD countries as reported by IPAs. This can be particularly helpful to facilitate investment, as OECD research finds that in 60% of OECD countries, investors need to engage with more than three public entities to establish a company (OECD, 2024[31]). Similarly, 34% of respondents reported that their jurisdictions provide land and infrastructure, such as industrial parks, to encourage firms to settle and develop in specific locations. Conversely, differential regulations and standards are less common, according to survey results, with just 23% of OECD governments offering them. The limited adoption of regulatory incentives aligns with economic literature, suggesting that countries with higher income levels typically boast better regulatory environments, diminishing the need for regulatory competition (FitzGerald, 2002[32]). According to the survey results, Türkiye's preferential treatment in public procurement can encourage greater investor participation in tenders. These incentives complement other measures, such as the introduction of an e-tendering system, which allows both domestic and foreign companies to register and submit bids more easily (WTO, 2023[33]).
1.2.3. Incentive schemes are governed by a patchwork of laws and regulations
The legal frameworks governing investment incentives in OECD countries typically involve multiple legal instruments (Figure 1.4.A). On average, countries employ five different legal instruments to govern their incentives mix, consisting of tax, financial, regulatory, and other benefits. Tax laws are the predominant legal framework for tax incentives, used by 86% of countries, underscoring their central role in defining and regulating tax benefits. Survey results indicate that tax incentives are also governed by laws other than the tax law, including supranational laws and investment laws, in 59% and 49% of countries, respectively. For non-tax incentives, supranational legislation and investment laws are the primary legal frameworks, used in 54% and 49% of cases, respectively, according to IPAs. Subnational regulations and sector-specific laws also wield a certain influence, particularly for non-tax incentives with 37% and 34%, respectively, highlighting the role of regional authorities and industry-specific regulations in shaping incentives for investors. While private negotiations with investors are used in granting both tax and non-tax incentives, these practices are relatively uncommon, occurring in only 14% and 20% of countries, respectively. Discretionary decisions in the provision of both tax and non-tax incentives can increase the risk of undue influence (IMF, OECD, UN, World Bank, 2015[24]).
As a percentage of OECD countries (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
Despite the multiple legal frameworks governing investment incentives in OECD countries, the majority of OECD IPAs (80%) report extensive awareness of the full spectrum of incentives available in their jurisdiction, with the remaining 20% demonstrating moderate awareness. From the investors' perspective, navigating scattered and complex legal frameworks can be time-consuming and limit their awareness of the full incentive regime. Incentives aimed at attracting investors prove ineffective if investors are unaware of them, or inefficient if they are only advertised to a limited audience (OECD, 2023[3]). While information on investment incentives and their eligibility is available in various forms, centralised platforms or websites dedicated to investment incentives are offered in only 37% of OECD jurisdictions according to respondents (Figure 1.4.B). For 80% of OECD countries, information on investment incentives and eligibility is typically scattered across various government websites. While an additional 83% also offer information in promotional materials (investor guides, B2B brochures, site visits), these materials can be difficult for potential investors to locate.
This dispersed structure across multiple regulations and multiple websites creates limitations in transparency of incentives for investment facilitation purposes. In many countries, transparency on incentives is limited by the fact that provisions governing incentives are spread out across numerous laws and regulations. Opaqueness on investment incentives may not only affect their potential uptake but also complicates assessments of their costs and benefits (OECD, 2023[3]). This points to the need for better co-ordination with other agencies for enhancing availability, accessibility and clarity of the information on investment incentives for investors (Box 1.3).
In the context of the OECD’s programme of work on investment incentives, the OECD aims to support enhanced transparency of investment incentives. The lack of a clear definition and typology for investment incentives has hindered governments' ability to assess transparency gaps and implement improvement measures. The OECD has set out key principles and a first set of guiding questions that can be part of a checklist to follow by policymakers to improve transparency of investment incentives.
Typology of investment incentives for enhanced transparency
The OECD has developed a comprehensive typology of investment incentives with three overarching types of investment incentives – i) tax, ii) financial and in-kind, and iii) regulatory and non-financial incentives, that are further sub-categorised by the specific instruments used to deliver investment incentives (e.g. for tax incentives the length of tax exemptions, the degree of CIT reductions, and the rate and applicability of tax allowances and credit).
Key principles for transparency
The OECD has established three core principles that can serve as a practical checklist for policymakers seeking to enhance transparency in investment incentives:
Availability: Ensuring the comprehensive and up-to-date availability of all relevant information and legislation pertaining to investment incentives.
Accessibility: Providing access to relevant legislation is particularly important given that incentive details are often not consolidated into one legal piece.
Clarity: The information should be presented with clarity. While some incentive programmes may be inherently complex, the information provided should be readily understandable, minimising confusion for investors.
Source: OECD (2023[3]), “Improving transparency of incentives for investment facilitation”, OECD Business and Finance Policy Papers, No. 35, OECD Publishing, Paris, https://doi.org/10.1787/ab40a2f1-en.
1.3.1. OECD countries often use stakeholder consultations and benchmarking in the design of investment incentives
The design of investment incentives is a crucial factor in determining their benefits and costs (OECD, 2024[34]) (OECD, Forthcoming[35]). Effective incentive design depends on various country-specific factors, including the type of industry, business size, and overall economic conditions (OECD, Forthcoming[35]). Factors like inflation and interest rates can also affect the cost and effectiveness of these programmes, highlighting the need for careful consideration during the design process. This involves selecting the appropriate type and instrument of the incentive, defining qualifying income or expenditures and other eligibility criteria, and determining the level of financial support. To determine these different factors, the design process involves consulting relevant stakeholders and, in some cases, considering the investment incentives offered by other countries.
Stakeholder consultations are integral to the design of investment incentives in OECD countries. While only three countries do not conduct consultations, 91% bring insights and perspectives from different actors, predominantly the private sector, as chambers of commerce and investors are consulted by 85% and 71% of countries, respectively (Figure 1.5.A). Engaging relevant parties, including the private sector, but also academia, trade unions and civil society, in inclusive decision-making processes helps building consensus on policy reforms related to investment and sustainable development (OECD, 2022[36]). Investment incentives with a legal basis often undergo a public consultation process as part of their development to gather input from various stakeholders. This approach facilitates the formulation of more effective policies and regulations and strengthens the legitimacy of decision making overall (OECD, 2020[37]).
The dialogue with the private sector can significantly inform the design of investment incentives, but the extent of this influence is moderate. According to the survey, private sector input has some influence in 53% of cases, but not necessarily a decisive role, as these inputs might be balanced with other factors such as observed market failures and policy objectives (Figure 1.5.B). For 19% of IPAs, private sector input plays a more limited role in shaping these programmes, which might be predetermined based on political priorities or when the incentives' governing legal framework is supranational legislation, as is often the case in EU countries. On the other hand, 16% of jurisdictions reported a more substantial private sector influence in shaping incentive programmes. This can be beneficial in identifying existing weaknesses, but it also raises concerns about the need to reflect the interests of society at large and avoid potential rent-seeking behaviour.
Consultation and involvement of stakeholders in incentive design as a percentage of OECD countries (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
According to IPAs, benchmarking other countries' incentive schemes is a common practice among OECD nations for designing incentives, with the vast majority indicating that it influences their approach in a way or another (Figure 1.6). While two-thirds of countries report considering other countries' incentives to some extent, only 12% use investment incentive decisions from other jurisdictions to a great extent, meaning they could replicate or overbid those offered by other countries. One out of five countries reports limited influence of international benchmarking in their design. There is a risk that overreliance on benchmarking may lead to incentives being designed merely to match those of other countries rather than responding to domestic needs, potentially resulting in inefficiencies (Tuomi, 2012[6]).
As a percentage of OECD countries (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
The amount of financial benefits is typically determined based on specific objectives and parameters. Over two-thirds of OECD countries base their financial incentives on quantitative parameters, such as the amount of investment, number of jobs created and return on investment (Figure 1.7). These parameters rely on measurable data, offering greater transparency due to clear and pre-defined evaluation criteria. Additionally, 43% of OECD IPAs report that governments rely on expert assessments to estimate the project's potential value, building on data with expertise and judgment. In 34% of jurisdictions, the financial benefit of incentives is determined by the funding gap, i.e. the aid needed to attract an investment that would not occur otherwise. In another 34%, other criteria, including the legal framework, are used to assess the benefit. For EU OECD countries, this often aligns with EU State Aid rules, where the aid intensity (percentage) depends on geographic location and company size. Negotiating incentive amounts individually with investors is less common, with only 26% of countries adopting this approach. This method often involves significant pressure to offer generous incentives, stemming from internal lobbying and external competition from other countries offering attractive packages (OECD, 2023[38]; IMF, OECD, UN, World Bank, 2015[24]). Only three countries use benchmarking practices to estimate the amount of the benefit to be granted in their incentive packages with those of other countries. Such benchmarking may lead to over-subsidising projects and misallocating resources, potentially resulting in a 'bidding war' where countries focus on matching offers rather than addressing market failures or reducing project costs efficiently based on local conditions (Christiansen, Oman and Charlton, 2003[39]).
Criteria used for determining the financial benefit in incentive design (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
1.3.2. Incentives often include investment size criteria; firm size, ownership or origin conditions are rare
Investment size conditions are typically used by policymakers in the design of incentives. According to IPA reports, most OECD countries (83%) have at least one incentive programme that includes investment size conditions, be it the minimum amount invested or the number of jobs created. Almost half use dual conditions based on both capitals invested and jobs created (Figure 1.8). The remaining programmes rely on either the investment amount alone (28%) or job creation solely (6%). Investment size conditions could ensure that resources are used efficiently while limiting incentives to large investments can also reduce administrative costs for the government (Celani, Dressler and Wermelinger, 2022[2]; IMF, OECD, UN, World Bank, 2015[24]). But setting a high investment threshold might exclude smaller businesses or innovative startups, or sectors that are not labour-intensive. For example, the Lithuanian parliament recently adjusted the Green Corridor for Large-Scale Investment Projects incentive by introducing a less stringent full-time job creation requirement. This change reflects an adaptation to the increasing capital intensity of manufacturing projects, aiming to attract more FDI in digital sectors (Box 1.4).
Percentage of countries with investment size criteria for at least one incentive (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
The green corridor for large-scale investment incentive combines size, location, and sectoral criteria, offering benefits such as 0% CIT for up to 20 years, contingent on meeting specific performance requirements.
Recently, legislation introduced a change in the eligibility conditions. While the original criteria required investors to create at least 150 new full-time jobs (200 in Vilnius), the new rules allow companies to qualify by creating between 20 and 149 new jobs (or 20-199 in Vilnius), provided that at least 20 of these positions offer wages at or above 1.25 times the average municipal wage. This adjustment reflects a shift toward accommodating projects with higher capital intensity and less labour intensity.
Source: The Ministry of the Economy and Innovation of the Republic of Lithuania. Sector activities available at: https://eimin.lrv.lt/en/sector-activities/investment/.
While investment size conditions are common across OECD countries, they are generally unrestricted in terms of firm size or origin. The survey shows that in three-quarters of OECD jurisdictions, governments do not discriminate between foreign and domestic investors when granting incentives, or between large firms and small and medium-sized enterprises (SMEs) (Figure 1.9.A). While attracting investment from large and foreign enterprises is often seen as particularly valuable because it can provide access to capital and technology unavailable in the domestic market (Johnson and Toledano, 2022[27]), attracting SMEs is often overlooked. However, their smaller size can also be an advantage, providing greater flexibility to accelerate innovation and adopt new technologies (OECD, 2022[40]). Moreover, SMEs tend to rely more on local suppliers and partners compared to MNEs, increasing the potential for productivity and innovation spillovers to local economies (UNCTAD, 2024[41]; OECD, 2023[42]). They are also less likely to crowd out local firms, positioning them as potential game changers in a global context characterised by increased competition for a shrinking pool of large-scale projects. (UNCTAD, 2024[41]).
Percentage of countries with firm-type conditions used as a criterion for at least one incentive (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
Similar to the absence of discrimination based on firm size or origin, most OECD jurisdictions also allow state-owned enterprises (SOEs) to apply for investment incentives according to IPAs. Globally, SOEs account for 20% of investment, and foreign SOEs are increasingly interested in entering developed markets through international mergers (Huq et al., 2024[43]). According to survey results, 65% of OECD jurisdictions allow SOEs to apply for investment incentives and this share goes to 71% when including companies with limited government ownership (Figure 1.9.B). Nearly half provide SOEs with access to the full range of incentives available to private companies. In 12% of jurisdictions, SOEs receive specific tax incentives, while another 6% offer them non-tax incentives. The degree of government ownership can influence eligibility, however. For instance, Germany and Canada restrict access to incentives for fully owned SOEs, suggesting a stricter approach for businesses of the state. On the other hand, a significant portion of jurisdictions (29%) exclude SOEs from investment incentives. This exclusion can be attributed by concerns that SOEs receiving incentives could alter the playing field (OECD, 2012[44]).
Location-based conditions are a prevalent feature of investment incentive design across OECD countries, with 32 out of 35 surveyed jurisdictions using them for at least one incentive. These conditions often target underdeveloped or remote areas specifically. Notably, two-thirds of IPAs report that location-based incentives are primarily targeting remote or less developed regions (Figure 1.10). This focus aligns with the broader policy goal of reducing regional disparities as showcased in section 1.2. Supporting evidence comes from the observation that, across the OECD, the top 10% of regions attract 700 times more FDI than the bottom 10% (OECD, 2022[45]). The emphasis on regional development is further underscored by the fact that 72% of OECD countries have dedicated regional investment promotion strategies, and 94% of national investment promotion strategies incorporate a regional development dimension (OECD, 2022[45]). To further concentrate investment, a third of IPAs indicate that at least one of their incentives targets investments within special economic zones (SEZs). In contrast, location-based criteria targeting industrial parks are less common, being present in less than a quarter of jurisdictions according to survey results.
Share of countries with location-based criteria for at least one incentive (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
Additionally, OECD countries commonly use sector-based conditions to grant investment incentives, as 77% use incentives specifically designed to target selected sectors. Sector targeting is sometimes used to contain the fiscal costs of tax incentives and to benefit only those projects, sectors, and sub-sectors that are considered most in need or likely to create social and economic spillovers (Celani, Dressler and Wermelinger, 2022[2]). It also carries the risk of misallocation of resources, however, such as directing incentives in sectors that would have attracted investment anyway.
OECD countries tend to target sectors that promote a more digital and environmentally sustainable economy, and this shift is reflected in the sectors that receive the most incentives. According to IPAs, 66% of OECD countries offer at least one incentive for the renewable energy sector, while 57% provide incentives for the battery and electric vehicle industry – sectors that are essential to the green transition. These two sectors are among the top three targeted sectors on a list of 30 possible options (Figure 1.11). Similarly, sectors crucial for the digital transformation, such as semiconductors (51%), information and communication technologies (49%), and artificial intelligence (40%), are among those with the highest reported prevalence of incentives, according to IPAs. Conversely, traditional sectors, such as forestry and wood, textile and clothing, real estate, oil and gas, and retail, receive much less incentives. This strategic focus is reflected in the substantial growth of climate focused FDI, which surged from less than 2% of global greenfield investment in 2005 to 39.4% in 2022 (fDi intelligence, 2023[46]).
Percentage of countries offering at least one incentive in a specific sector and of IPAs prioritising a specific sector (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
Targeted sectoral incentives and IPA sectoral priorities, by country (as reported by IPAs)
Note: ✓ = Incentives offered ■ = Priority sector for IPA.
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
Sector targeting is a common approach in OECD investment promotion, with IPAs often focusing on at least two specific industries (Table 1.3). As part of their investment promotion strategy, OECD IPAs prioritise some sectors by dedicating more resources to develop tailored tools to attract and support investment in these areas. The survey suggests that OECD IPAs tend to prioritise a wide range of sectors, with an average of ten per agency. The distribution shows that 26% of IPAs prioritise 0-5 sectors in their investment promotion strategies (Figure 1.12). A larger share, 37%, focuses on 6-11 sectors, while 29% targets 10-14 sectors. However, only 8% of IPAs prioritise more than 15 sectors. This indicates that while IPAs have a sectoral approach to their promotion strategies, their focus is typically on specific sectors rather than a broader, more general approach to all sectors. The literature suggests that IPAs are more likely to succeed when they focus strategically on promoting specific sectors. Existing research shows that sector targeting results in higher FDI inflows (Harding and Javorcik, 2012[9]). One study focusing on OECD countries found that IPAs targeting industries increased FDI inflows into those industries by 41% (Charlton and Davis, 2007[47]). Having many priority sectors, even though could be less distortive, it could result in spreading budget and human resources across numerous sectors, leading to a lack of expertise and focus. IPAs may struggle to develop tailored strategies and marketing materials, as well as outreach efforts for each sector when dealing with such a broad range of industries.
As a percentage of OECD IPAs
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
← 1. Tax allowances may relate to current expenditure (e.g. operation expenses) or capital expenditures. Tax allowances may allow for a faster write-off of the value of capital expenditure from taxable income up to 100% of incurred costs (i.e. acceleration) or can go beyond 100% of acquisition cost (i.e. enhancement). This could include, for example, allowing firms to deduct 150% of the value of a new machine. Tax allowances for current expenditure are always enhancing. Source: OECD (2022[1]) “Investment Tax Incentives Database – 2022 Update: Tax incentives for sustainable development (brochure)”, OECD Publishing, Paris, https://www.oecd.org/investment/investment-policy/oecd-investment-tax-incentives-database2022-update-brochure.pdf.