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participation in productive enterprises established jointly with Russian legal
entities and citizens. Foreign investment can also take the form of establishing
companies fully owned by foreign investors or branches of foreign legal entities.
Foreign investors can acquire enterprises, ownership rights, buildings, a
portfolio of shares or bonds. Foreign investors are entitled to acquire rights to
utilize land and other natural resources, or other ownership rights.
The scope of foreign capital participation in the domestic economy depends
on how attractive this economic system is for foreign investors. It should be
borne in mind that foreign investors may choose from quite a range of
international projects in various fields and at different levels (e.g. regional,
national, international). It is therefore necessary to stimulate cash flow and to
direct it in accordance with the borrower's needs. As it has been noted above,
there is no fundamental difference in encouraging domestic or foreign
investment. We can only talk about the specificity of this capital flow generated
by a non-resident participation in the investment deal. There are several ways to
encourage the inflow of foreign capital in the national economy:
- assist in collecting information about investment opportunities in the
country, individual regions, and industries
- provide opportunities for designing a convenient scheme of financing
projects, allocation of land, etc.
- offer protective tariffs for the products competing with those produced by
foreign investors
- use duty-free imports of equipment and materials required for
implementation of investment projects
- set FX limits, which will enable to forecast fluctuations of the national
currency exchange rate
- create tax concessions
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- introduce legislative protection measures
The benefits from foreign capital inflow for the national economy are as
follows. The growth of the total income from foreign investment is higher than
the growth of the investor return. If foreign investment contributes to efficiency of
the national economy, then the marginal product is distributed in the following
areas. First, investors receive their share of income in the form of dividends,
deduction from profit, rents, etc. Secondly, employees (labor force) receive their
salary and wages. Thirdly, generally, the saturated commodity market leads to
lower prices, which can be regarded as an aggregate income of all consumers,
residing in the country. Finally, the expansion of production, and a rise in labor
payments will inevitably cause the replenishment of the state treasury, as tax
liabilities and fringe benefit expenses increase. In addition, most importantly,
investment may often offer many indirect benefits owing to economic openness
of the region or the whole country.
Findings of foreign studies do not give enough evidence to support the idea
that raising incentive levels always results in the increased amount inward
foreign investment (Loree & Guisinger, 1995). In their opinion, incentives
offered by one country or even a region “may well trigger a response from
countries that are competitor for foreign investment, ending in the prisoner’s
dilemma trap where all countries increase their incentives.” However, in their
attempts to attract more foreign investment, regions can create redundant
incentives and may lose part of their revenues as “there is no reason to believe
that a dollar spent on incentives has a higher return, in the form of increased
foreign investment, than a dollar spent on infrastructure’ (Loree & Guisinger,
1995). Therefore, it is advisable to remember that the guarantee of investment
helps remove disincentives, but do not encourage the investment flow in the
regional economy.
The attraction of foreign capital mainly depends on opportunities to receive
and to export expected returns. Some host countries offer tax concessions (e.g.,
the effective tax rate on corporate income), but this incentive works if there is
real income. Foreign investors are much more interested in maximizing their
income rather than using tax incentives. Therefore, tax concessions, so much
spoken about in the press, are not the primary driver for investment, but rather
necessary conditions for such investment. Along with guarantees against the risk
of expropriation or worsened conditions of investment, foreign capital providers
carefully consider the risk of suffering losses due to other in-country reasons.
The recipient country may initially agree to 100% foreign ownership of the
ongoing project, but then it may insist on a gradual involvement in the project
by providing domestic capital and national resources. In addition, an over-use of
tax incentives may have negative consequences, regardless whether investors are
foreign or domestic.
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Nevertheless, financial incentives do need to be provided, and an educated
investor, ceteris paribus, chooses the most favorable (tax-free) region. The
absence of tax concessions in regions and industries may lead to the fact that
foreign investors will consider their own interests only.
Major barriers to boosting foreign investment are exchange control and
state control over capital formation: they restrict foreign access to local financial
markets, limit the freedom of capital repatriation and dividends; and lower the
share of local companies’ statutory capital that can be owned by foreigners. At
the same time, the absence of these constraints weakens the control over foreign
capital. A reasonable compromise helps both sides of investment transactions
sort out the problem.
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