This chapter builds on data from the 2024 OECD Survey on Investment Promotion and Investment Incentives to highlight the importance of investment incentives in the broader investment promotion strategies of IPAs and discusses how they perceive and use incentives to attract various types of FDI projects. The chapter also examines the role of national IPAs in the governance of incentive design and management, including their role in the promotion of incentives, the efficiency of co-ordination mechanisms as well as their involvement in monitoring and evaluating their use and impact.
The Role of Incentives in Investment Promotion
Trends and Practices in OECD Member Countries
Abstract
2.1.1. Investment incentives often align with IPAs' overall priorities, but there's a lack of consistent incentive support for some sectors
Investment incentives are generally aligned with the strategic objectives and priority sectors of IPAs in most OECD countries (Figure 2.1). The survey reveals that 94% of participating IPAs report a certain degree of alignment between the incentives granted in their country and at least one of their tools or priorities – be it their strategic objectives, priority sectors, key performance indicators (KPIs), priority projects or priority investors. Only Denmark and Switzerland report no alignment between their incentive regime and their IPA priorities. While incentives are typically designed by ministries or other agencies, 83% of IPAs consider that they align with their strategic goals, making them instrumental in achieving these objectives. Additionally, 71% of IPAs report that incentives match their target sectors, thus helping to focus their investment promotion efforts on government-designated priority industries, such as digital and green sectors (Section 1.4). Just over a half of IPAs indicate that incentives are aligned with their priority projects, which are defined by specific characteristics like potential for high innovation, significant job creation, or substantial capital investment.
Alignment of Incentives (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
While a majority of IPAs report that incentives are aligned with their priority sectors, the survey reveals a slight misalignment between the sectors targeted for investment incentives and those prioritised by IPAs (Figure 2.2). There are 13 sectors (43% of all possible sectors) that are considered a priority by IPAs but where incentives are not always provided, particularly in high value-added sectors like advanced manufacturing, renewable energies, digital health, health and pharmaceuticals, and ICT. Conversely, 14 sectors (47%) see a higher portion of countries offering incentives than those prioritised by IPAs. These include textile and clothing, tourism and hospitality, and heavy machinery. There is a perfect match between the sectors targeted by investment incentives and those prioritised by IPAs in only 10% of the assessed sectors, notably mining and critical minerals, agrifood and food processing, and real estate. To address this, improved co-ordination between investment policymakers involved in designing and targeting sectors and IPAs, which are at the forefront of investment promotion, is crucial.
Percentage gap between average OECD sector-specific incentives and IPA-identified priority sectors
Note: Sectors labelled as “Incentive Focus” have a higher percentage of countries offering incentives compared to the percentage of IPAs that consider the sector a strategic priority. The difference between these percentages is shown on the graph. Conversely, sectors labelled as “IPA Priority” have a higher percentage of IPAs prioritising the sector compared to the percentage of countries offering incentives. The difference is also shown on the graph.
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
2.1.2. OECD IPAs typically consider investment incentives as one of several factors influencing investment decisions
The investment location decisions of MNEs are influenced by a host of factors that are context-driven with important spatial and sectoral differences (OECD, 2023[48]). In this context, a significant portion of OECD IPAs do not consider incentives, particularly tax incentives, to play a critical role in foreign firms’ location decisions (Table 2.1). On a scale from 0 to 10, CIT tax incentives are rated 5.3 by IPAs on average, indicating moderate relevance for MNE location decisions. Other tax incentives are even less influential with an average ranking of 4.7. Non-tax incentives receive a higher average ranking of 6.5, indicating they are perceived as somewhat important but not decisive factors. Only a small percentage of IPAs consider incentives to hold significant weight in location decisions, with 12% of IPAs giving a score of 9-10 for CIT tax incentives, 6% for other tax incentives, and 24% for non-tax incentives. Scholars echo this view, noting that tax incentives rarely drive location choices, as firms first select locations that meet their basic production needs and then seek incentives (Katitas and Pandya, 2024[49]). Thus, incentives often serve as a tiebreaker during the final stages of negotiations between investors and governments of shortlisted investment locations (Andersen, Kett and von Uexkull, 2018[8]).
(With 1 being the lowest and 10 the highest)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
When comparing perceptions across OECD IPAs, smaller economies – particularly non-G20 countries – place relatively higher importance on CIT incentives for MNE location decisions. In contrast, larger countries tend to place more weight to non-tax incentives. Additionally, the correlation between a country's GDP size and the emphasis on incentives shows that IPAs from smaller economies consider incentives more critical in investment location decisions (Figure 2.3). Similarly, from a geographic perspective, IPAs from OECD Latin American countries rate incentives as more significant than those in other regions, with scores of 6.7 for CIT incentives, 7.0 for tax incentives, and 7.7 for non-tax incentives, all above the OECD average.
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
Alongside these findings, incentives are often considered lower-ranking factors compared to other factors that are important to attract FDI, regardless of the type of investment (Table 2.2). Factors like the quality of infrastructure and connectivity, the availability of an educated workforce, and an enabling legal and administrative environment are the top factors across the three main types of investments, whether natural resource-seeking, export oriented or market-seeking. The size of market and growth prospects is the perceived as the most important factor for the latter. When looking at incentives more carefully, it is for export-oriented investments, which aim to exploit cost advantages in production for global markets, that CIT incentives rank the highest as compared to other incentives, yet only at the 7th place when compared to other factors. In contrast, for natural resource-seeking investments, which aim to exploit local resources, and market-seeking investments, which focus on penetrating a local market, CIT incentives are even less important, at the 8th and 9th positions, respectively.
The survey findings coincides with recent literature highlighting that investors typically do not prioritise incentives highly among the factors influencing their investment decisions (Johnson and Toledano, 2022[27]) In contrast, factors such as the availability of skilled workforce, market size and growth prospects, robust infrastructure, and an enabling legal and administrative environment are typically ranked higher. Natural resource availability is understandably crucial for natural resource-based investments, but less so for export-oriented and domestic-market projects. This result also aligns with research that highlights essential factors MNEs consider when choosing investment locations. These factors include governance reforms, development of local suppliers, investments in domestic hard and soft infrastructure, human capital, and upholding the rule of law, characterised by predictability, transparency, credibility, accountability, and fairness (OECD, 2015[50]; Danzman and Slaski, 2021[5])
The slight variations in rankings across investment types highlight the relative importance of different incentives. CIT incentives tend to hold a stronger position compared to other tax incentives, particularly for export-oriented investments. This could be because exporting firms are typically highly mobile and cost-oriented, seeking to reduce expenses for products destined for the global market (Lewis and Whyte, 2022[51]). Conversely, investors oriented toward domestic markets are less sensitive to tax incentives, finding financial, in-kind and regulatory incentives more relevant.
By average ranking (from most important to least important factor)
Note: Not all IPAs provided rankings for all investment types. This could be due to a lack of relevant projects in certain sectors (e.g., natural resources) within some countries.
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
Some IPA professionals may perceive investment incentives as effective tools for investment attraction, particularly those with limited prior experience in the private sector and in developing countries IPAs where employee performance is often evaluated based on closed deals (Danzman and Slaski, 2021[5]). Findings in this report show, however, that IPA professionals do not consider investment incentives are decisive factors as compared to other criteria. Investment incentives, while important, are not perceived as the primary driver of investment attraction by OECD IPAs. Instead, IPAs use a multifaceted approach to attract FDI, where the promotion of investment incentives constitutes one component of their overall strategy. To attract and facilitate FDI, IPAs use a combination of functions, including image-building, investment generation, investment facilitation and retention, and policy advocacy (OECD, 2018[52]). When compared to key activities within these functions, OECD IPAs view the provision and promotion of tax and non-tax investment incentives as the least important elements of their strategies (Table 2.3). In contrast, measures related to image-building, investment facilitation and investment generation are ranked first, second and third, suggesting that delivering core activities and services to attract investment is considered more important than offering investment incentives.
Average ranking out of 10 possible options (from most important to least important measure)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
IPAs hence recognise that their strategies must go beyond investment incentives to effectively influence investors’ behaviour. Agencies are actively shaping investment promotion strategies through innovative initiatives. To attract the attention of global investors, some IPAs are crafting compelling country brands that effectively communicate unique value propositions, highlighting competitive advantages and showcasing the investment climate. Others are providing comprehensive support, from initial market research and site selection to business setup, support for talent identification and ongoing aftercare services (Box 2.1).
Choose France Summit
Choose France aims to present and explain to major international companies the existing investment and reforms being carried out to promote economic activity in France. It also highlights the importance of international investment in supporting growth, innovation and employment throughout France.
Every year, almost 400 bilateral meetings are organised between the President of the Republic, ministers, and the heads of foreign and French companies to discuss their plans for setting up in France. According to the French Government, the results of Choose France Summit are the following:
10 451 foreign investment projects in France over the period 2017 to 2023.
307 940 jobs maintained or created between 2017 and 2023.
France remains the most attractive country for foreign investment for the fifth year running.
Invest Japan Hotline
JETRO's hotline aims to facilitate investor setup by offering consultations regarding the administrative procedures required for FDI into Japan. Besides arranging meetings with officials of regulatory agencies if needed, a JETRO staff member will escort the foreign company or foreign-affiliated company representative and provide language support during the consultation with the relevant authorities.
The hotline can also be used to improve the business climate, as investors can request regulatory reforms. After examining the request, the Cabinet Office will ask the relevant authorities to consider possibilities of reform. Certain answers from the relevant authorities may be reported to the Regulatory Reform Council for discussion. The result of the deliberation at the Council will be reported to the foreign company or foreign-affiliated company through JETRO if it is to be released to the public.
Source: Elysée (2024[53]), “Choose France”, https://www.elysee.fr/emmanuel-macron/choose-france; and JETRO (2024[54]), Invest Japan Hotline, https://www.jetro.go.jp/en/invest/jetros_support/hotline/.
2.1.3. The limited role of incentives in investment promotion suggests OECD IPAs will not shift strategies with the introduction of the Global Minimum Tax
The evolving global tax landscape, including the implementation of the Global Minimum Tax (GMT)1 could affect the role of both tax and non-tax incentives in OECD IPAs’ promotion strategies. The GMT mandates a 15% effective tax rate, in every jurisdiction where they operate, for large MNEs groups with annual global revenues exceeding 750 EUR million. This requirement may limit the effectiveness of certain tax incentives that reduce firms' ETRs below 15% (OECD, 2022[55]). Differences in taxation between jurisdictions are estimated to fall, which will likely increase the importance of non-tax factors in influencing investment decisions and could improve the allocation of capital globally (OECD, 2024[56]).
In this context, the majority IPAs in the OECD (60%) report that they do not expect a change in their investment promotion strategy (Figure 2.4). This reflects that the promotion strategies of OECD agencies are generally not overly relying on tax and non-tax incentives. Conversely, among those expecting to modify their strategies, a combination of different measures will be undertaken, with 29% of IPAs planning to streamline bureaucratic procedures, the same share focusing on improving regulatory certainty and the quality of legislation, and an equal percentage shifting to other types of tax and non-tax incentives. Only seven IPAs are expecting to focus more on strengthening their marketing efforts.
Expected changes of investment promotion due to the GMT (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
The design, granting and monitoring of investment incentives involve a complex interplay among different institutions. This leads to diverse institutional governance arrangements, where the role of IPAs in providing, designing and evaluating incentives varies widely across OECD countries, especially since other national and subnational institutions are often involved. Similarly, the M&E of investment incentives for assessing their effectiveness also involve different institutional arrangements. The participation of multiple stakeholders results in various collaboration mechanisms.
2.2.1. IPAs mostly serve as the main focal point on incentives and can play a relatively more important role for non-tax incentives
IPAs can play different roles in the governance of tax and non-tax incentives, but, overall, the survey shows that IPAs are more active in the latter (Figure 2.5.A) For instance, Invitalia, the Estonian Investment Agency, Germany Trade & Invest, LuxInnovation, Spirit Slovenia, New Zealand Trade and Enterprise and the United Kingdom Department for Business and Trade, do not directly participate in the governance of tax incentives but actively participate in several functions related to non-tax incentives (Figure 2.5.B). This could be because CIT and other tax incentives tend to be governed mostly by tax laws, under the responsibility of tax authorities and finance ministries, while non-tax incentives typically involve a broader range of institutions depending on the types of incentives. The survey results show that OECD IPAs are operational agencies and mainly act as promoters of incentives, as they serve as contact points rather than being directly involved in designing or granting them. More than half of agencies (57%) serve as the main contact point for information on tax incentives while 69% do so for non-tax incentives. IPAs also play a significant role in advocating for incentives, with 40% doing so for tax incentives and 57% for non-tax incentives. In the same vein, IPAs are consulted much more often for the design of non-tax incentives (60%) than for tax incentives (37%). However, IPAs are less involved in directly designing and granting incentives. No OECD IPA has the legal authority to design or grant tax incentives, and only the Estonian Investment Agency and Innovation Norway have this authority for non-tax incentives.
Role of OECD IPAs in incentives governance (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
The involvement of IPAs in the governance of investment incentives and the importance of these incentives in investment promotion influence each other. Survey evidence shows that IPAs that engage in a broader range of incentives-related activities – such as serving as the main contact point, advocating for additional incentives, participating in the design, administration and granting of incentives – are more likely to view investment incentives as essential tools for attracting FDI (Figure 2.6). Although the correlation coefficient is not particularly strong, the tendency is particularly noticeable for CIT incentives.
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
Countries can adopt various institutional arrangements to manage the application processes for investment incentives, including reviewing applications, providing approvals and ensuring compliance with legal requirements. While IPAs primarily serve as promoters and information providers, they still play either a leading or a secondary role in the granting of incentives in 70% of cases (Figure 2.7.A). Additionally, while finance ministries are the lead entities only in less than 10% of cases, two-thirds of IPAs indicate that other ministries act as the main counterparts for investors applying for incentives, namely economic, industry, trade or sector-specific ministries. Subnational authorities are also important actors in the management of applications, as they are the lead authorities in 35% of OECD countries and involved in another 35%. This is the case, for example of Türkiye’s regional development agencies or the local government agencies or major offices in Colombia. Finally, 34% of IPAs identified other entities as the main authorities, such as the tax administration agencies in Finland and Iceland or the Austrian federal development and financing bank in Austria.
When investors seek to apply for investment incentives, they must often engage with several actors throughout the process. All surveyed IPAs from OECD countries indicate that investors must interact with various entities to secure incentives, suggesting a lack of centralised application procedures. On average, each country has 1.85 lead entities and 1.5 additional entities involved (Figure 2.7.B). This fragmentation can make the application process more complex and time-consuming for investors compared to a centralised system with a single point of contact as can be found in some jurisdictions (Box 2.2).
OECD government institutions’ role in granting incentives (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
In Poland, investors seeking incentives initially contact the Polish Investment and Trade Agency (PAIH), the national IPA, which conducts a preliminary screening to assess their eligibility for investment incentives. PAIH evaluates the firms’ data and determines eligibility for specific incentives.
With regard to the governmental grant, PAIH based on the information obtained from investors, prepares a project description. This description includes an assessment of the investment and the proposed amount of support, along with a justification. The completed description, along with supporting documents, is then submitted by PAIH to the Ministry of Economy. An interministerial committee reviews the application and recommends a grant amount, after which the ministry makes the final decision. The investor has 30 days to accept the proposed support and, if accepted, an agreement is concluded.
Source: Polish Investment and Trade Agency (2024[57]), Investment incentives, https://www.paih.gov.pl/en/why_poland/investment_incentives/governmental_grants/
2.2.2. The coexistence of subnational and national incentives and the degree of decentralisation can influence how subnational authorities govern them
As mentioned previously, subnational authorities often play a significant role in the governance of incentives, particularly in countries with high levels of decentralised spending and taxation. These roles could involve evaluating applications and awarding incentives, overseeing compliance with incentive agreements, or developing policies for incentives. When OECD countries are grouped by decentralisation models and forms of state – whether unitary or federal – a distinct pattern emerges. In federal countries, there is a higher proportion of subnational IPAs with multiple roles related to incentives (Figure 2.8.A). In contrast, unitary countries have a higher proportion of subnational IPAs with little or no involvement in incentives. This trend also holds when considering the OECD’s typology based on fiscal indicators (Figure 2.8.B). In highly decentralised countries, subnational IPAs are more active in the governance of incentives, with all such countries involving subnational entities in this process. This contrasts sharply with low-decentralisation countries, where subnational authorities are not involved in incentive governance in 56% of cases, highlighting a clear divide based on the level of decentralisation.
Note: In the case of fiscal decentralisation (Panel B), four categorised of countries are based on their levels of decentralised spending and tax revenues.
Source: OECD elaboration based on (OECD, 2019[58]) and OECD Survey on Investment Promotion and Investment Incentives, 2024.
This decentralised approach allows subnational authorities to play varying roles in the design, granting and administration of investment incentives, ranging from policy development to compliance oversight. The survey highlights that, in 60% of cases, IPAs identified the evaluation of applications and the awarding of incentives as the most prominent role of subnational authorities (Figure 2.9.A). Design and compliance oversight were also significant, with both mentioned in 40% of cases. Subnational authorities are not involved in the governance of incentives in all OECD countries, as they do not participate in this process in 9 out of 35 countries.
Subnational incentives can be offered either in co-ordination with, or independently of, national incentives. This local-level decision making ensures that incentives are effectively targeted and responds to regional needs. While 17% of OECD countries do not offer subnational incentives, the remaining 83% do (Figure 2.9.B). When subnational incentives are offered, they are done so in co-ordination with national incentives in most cases (28%) to avoid overlap. Conversely, in 20% of cases, subnational governments choose their incentives at their own discretion and, in another 20% of countries, incentives are designed or applied differently across various regions. In only 9% of countries, regions offer the same incentives than to those available at the national level.
As a percentage of respondents (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
Navigating this complex landscape of national and subnational investment incentives, governed by different laws, can be time-consuming and challenging for investors. To address this, some countries are introducing tools to streamline the process, helping investors navigate complex financial support options, minimise upfront costs, and accelerate the timeline to profitability (Box 2.3).
In addition to federal incentives, US states also offer investment incentives. To help investors identify the most relevant incentives, SelectUSA has implemented the state business incentives database, a one-stop resource for information about incentive programmes in all 50 states. The database, which currently contains information on 2 438 programmes offered across states, provides information on programme description, objectives, and eligibility requirements.
SelectUSA has also developed the Target Industries Dashboard, a tool designed for international investors seeking to establish operations in the United States. The dashboard displays the US states and territories where different industries are prioritised and includes links to each state’s fact sheet and state sectoral incentives database page.
Source: C2ER (2024[59]), State Business Incentives Database, https://www.stateincentives.org/; and SelectUSA (2024[60]), Target Industries Dashboard, https://www.trade.gov/selectusa-target-industries-dashboard.
2.2.3. Informal collaboration between IPAs and other agencies is a common practice to align incentives with policy goals and facilitate implementation
Despite the involvement of different entities in the governance of incentives, IPAs’ interinstitutional co-ordination with national and subnational agencies tend to be informal. The institutional governance of investment incentives involves numerous ministries and agencies at the national and subnational levels, requiring effective co-ordination throughout the incentive ecosystem. As investment is a horizontal policy involving many institutions, collaboration is central to successful investment promotion efforts, with IPAs often playing a co-ordinating role between investors and various regional partners (Lewis and Whyte, 2022[51]). The survey reveals that most IPAs co-ordinate effectively to align incentive policy goals and ensure effective implementation, but informal mechanisms are prevalent (Figure 2.10). National IPAs have informal co-ordination mechanisms with national institutions in three-quarters of cases and with subnational institutions in half of cases. IPAs participate to a lesser extent in formal mechanisms, with 47% engaging formally with national actors and only 24% with subnational actors.
Percentage of OECD countries with IPAs participating in incentives co-ordination mechanisms (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
Despite the engagement of many IPAs in incentive co-ordination mechanisms, 18% of them – namely ABA Invest in Austria, Business Finland, the Hungarian Investment Promotion Agency, the Netherlands Foreign Investment Agency, Business Sweden, and Switzerland Global Enterprise – do not participate in either formal or informal co-ordination with subnational or national institutions (Table 2.4). The risk of limited co-ordination is that incentives may overlap, be inconsistent or even work at cross-purposes (IMF, OECD, UN, World Bank, 2015[24]).
Note: Coloured cells indicate the presence of a co-ordination mechanism. The IPA of Spain has a different type of co-ordination mechanism, which consist of ex-post controls to avoid overlapping of incentives.
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
2.2.4. Other government agencies often play a more prominent role in monitoring and evaluating incentives than IPAs
The participation of IPAs in the M&E of investment incentives is limited compared to other government entities. Monitoring tracks intervention progress over time, while evaluation examines incentives’ implementation, effectiveness and outcome achievement. A better understanding of whether investment incentives contribute to policy goals, and at what costs, requires comprehensive M&E (OECD, 2024[34]). According to the survey results, government entities are involved in 89% of monitoring activities and 91% of evaluation activities, while IPAs are involved in only 54% and 40% of these activities, respectively (Figure 2.11.A).
Despite their limited role, IPAs’ position as intermediaries between the government and investors allows them to participate moderately in some M&E activities. For example, 57% of IPAs request feedback from investors on incentives, which is the only activity where IPAs are not overshadowed by other parts of government given their direct interaction with investors (Figure 2.11.B and Figure 2.11.C). About a third of agencies also register the take-up of incentives, type and number of benefits granted per beneficiary, an activity which is nonetheless much more frequently conducted by policymakers (in 80% of countries). CzechInvest serves as a prime example of an agency conducting monitoring activities through its dedicated dashboard (Box 2.4). While IPAs are moderately involved in some monitoring activities – although to a much smaller extent than other parts of government – the difference is particularly striking for evaluation activities. For example, 71% of governments entities conduct cost-benefit analysis of incentives while only 17% of IPAs do so. The same proportions apply when it comes to assessing whether the policy objectives of incentives are met. Two-thirds of OECD governments assess the impact of incentives in specific regions, an activity consistent with the policy goals of many governments to support regional development (see first part of the paper).
CzechInvest has recently launched a dashboard that consolidates statistics on investment incentives. This dashboard provides up-to-date information on the incentives granted, categorised by sectors, type of investment projects, and country of applicant, as well as by region. It includes data on supported projects, total investment, and jobs created. Additionally, the dashboard offers granular information about the supported companies, detailing their investments, the jobs created, and the type of incentives granted, such as tax incentives, in-kind support like land, or financial incentives such as capital cash grants, grants for retraining among others.
Source: Czechinvest (2024[61]), Investment Incentives Statistics, https://www.czechinvest.org/en/For-Investors/Investment-Incentives.
Role of OECD IPAs in M&E of investment incentives (as reported by IPAs)
Source: OECD Survey on Investment Promotion and Investment Incentives, 2024.
← 1. The GMT aims to establish a 15% effective corporate tax rate for MNEs groups with annual revenues exceeding EUR 750 million. This measure addresses ongoing concerns about profit shifting, harmful tax competition, and a downward race in corporate tax rates. If an MNE's ETR in a jurisdiction falls below 15%, and it does not have strong substance in the jurisdiction (employment and tangible assets), it may be subject to top-up taxes under the Global Anti-Base Erosion (GloBE) Rules, a key component of Pillar Two of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Pillar Two will discourage MNEs from engaging in profit shifting and help countries achieve a better balance between attracting investment through tax policies and mobilising domestic revenues. Adopted by over 135 countries in 2021, the two-pillar solution addresses the tax challenges posed by the globalised and digitalised economy. As of 2024, around 60 jurisdictions are actively implementing the GMT.