Checklist for Foreign Direct Investment

Incentive Policies Checklist for Foreign Direct Investment Incentive Policies

Checklist for Foreign Direct Investment

Know About Foreign Direct Investment in India | Rajput Jain

Incentive Policies Checklist for Foreign Direct Investment Incentive Policies


Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD) shall promote policies designed: – to achieve the highest sustainable economic growth and employment and a rising standard of living in member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; – to contribute to sound economic expansion in member as well as non-member countries in the process of economic development; and – to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations. The original member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became members subsequently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996), Korea (12th December 1996) and the Slovak Republic (14th December 2000). The Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD Convention). © OECD 2003 Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through the Centre français d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, tel. (33-1) 44 07 47 70, fax (33-1) 46 34 67 19, for every country except the United States. In the United States permission should be obtained through the Copyright Clearance Center, Customer Service, (508)750-8400, 222 Rosewood Drive, Danvers, MA 01923 USA, or CCC Online: All other applications for permission to reproduce or translate all or part of this book should be made to OECD Publications, 2, rue André-Pascal, 75775 Paris Cedex 16, France.


This report is based on material assembled by Hans Christiansen, Principal Administrator in OECD Capital Movements, Investment Investment and Services Division, reviewed and refined by the OECD Committee on International Investment and Multinational Enterprises (CIME) in the course of 2002 and 2003. The project received financial support from the UK Department for International Development.


This booklet reproduces a report approved in April 2003 by the OECD Committee on International Investment and Multinational Enterprises (CIME). It comprises two main sections. The first section “Guiding Principles for Policies toward Attracting Foreign Direct Investment” is a statement endorsed by CIME as part of its consideration of incentive-based policies to attract FDI. The second section “Assessing FDI Incentive Policies: A Checklist” was released by CIME with the intention of providing policy makers with a tool against which to assess the usefulness and relevance of FDI incentive policies. The work in the report benefited from a large body of earlier OECD material dealing with investment incentives, and on additional pieces of work commissioned from academics and practitioners. An overview of the supporting material entitled “Incentives for attracting foreign direct investment: An overview of recent OECD work” can be found on the OECD website []


Guiding Principles for Policies Toward Attracting Foreign Direct Investment The present guiding principles originate from the OECD Committee on International Investment and Multinational Enterprise’s 2001-2002 review of incentives-based competition for foreign direct investment (FDI). The aim of policies for attracting FDI must necessarily be to provide investors with an environment in which they can conduct their business profitably and without incurring unnecessary risk. Experience shows that some of the most important factors considered by investors as they decide on investment location are:

  • A predictable and non-discriminatory regulatory environment and an absence of undue administrative impediments to business more generally.
  • A stable macroeconomic environment, including access to engaging in international trade.
  • Sufficient and accessible resources, including the presence of relevant infrastructure and human capital. The conditions sought by foreign enterprises are largely equivalent to those that constitute a healthy business environment more generally. However, internationally mobile investors may be more rapidly responsive to changes in business conditions. The most effective action by host country authorities to meet investors’ expectations is:
  • Safeguarding public sector transparency, including an impartial system of courts and law enforcement.
  • Ensuring that rules and their implementation rest on the principle of nondiscrimination between foreign and domestic enterprises and are in accordance with international law.
  • Providing the right of free transfers related to an investment and protecting against arbitrary expropriation.
  • Putting in place adequate frameworks for a healthy competitive environment in the domestic business sector.
  • Removing obstacles to international trade.
  • Redress those aspects of the tax system that constitute barriers to FDI.
  • Ensuring that public spending is adequate and relevant. The usage of tax incentives, financial subsidies and regulatory exemptions directed at attracting foreign investors is no substitute for pursuing the appropriate general policy measures (and focusing on the broader objective of encouraging investment regardless of source). In some circumstances, incentives may serve either as a supplement to an already attractive enabling environment for investment or as a compensation for proven market imperfections that cannot be otherwise addressed. However, authorities engaging in incentive-based strategies face the important task of assessing these measures’ relevance, appropriateness and economic benefits against their budgetary and other costs, including long-term impacts on domestic allocative efficiency. 1

Authorities need also to consider their commitments under international agreements. The relevance and appropriateness of FDI incentive strategies should be examined at regular intervals. Transparency and accountability at all levels of governments greatly increases the success of such evaluations. Investment incentives have effects beyond the jurisdiction that offers them, which need to be carefully considered. Some forms of competition among states for FDI may lead to sub-optimal results for all states, including waste of economic resources and social costs. OECD members and other countries adhering to the OECD Declaration on International Investment and Multinational Enterprises have undertaken commitments in this respect. 2

Under the instrument on International Investment Incentives and Disincentives, which is an integral part of the Declaration, they:

“… recognise the need to strengthen their co-operation in the field of international direct investment”;

“… recognise the need to give due weight to the interests of adhering governments affected by specific laws, regulations and administrative practices in this field providing official incentives and disincentives to international direct investment”;

“… endeavour to make such measures as transparent as possible, so that their importance and purpose can be ascertained and that information on them can be readily available”. 3

Furthermore, in 1984 the OECD Council decided upon

“… consultations in the framework of the Committee on International Investment and Multinational Enterprises at the request of a member country which considers that its interests may be adversely affected by the impact on its flow of international direct investment of measures taken by another member country which provide significant official incentives and disincentives to international direct investment… [T]he purpose of the consultations will be to examine the possibility of reducing such effects to a minimum.

” (International Investment Incentives and Disincentives, Second Revised Decision of the Council, May 1984.)4

Against this background the Committee has agreed on a Checklist for Assessing FDI Incentive Policies. The Checklist serves as a tool to assess the costs and benefits of using incentives to attract FDI; to provide operational criteria for avoiding wasteful effects and to identify the potential pitfalls and risks of excessive reliance on incentive-based strategies. The Committee also believe that careful evaluations of the Checklist and its application to considerations of investment incentives can have a positive effect in minimising potential harmful effects of incentives both for those that employ them and for other governments seeking to attract foreign investment. OECD members furthermore consider that it is inappropriate to encourage investment by lowering health, safety or environmental standards or relaxing core labour standards. The OECD Guidelines for Multinational Enterprises, which are an integral part of the Declaration, state that enterprises should:

“… refrain from seeking or accepting exemptions not contemplated in the statutory or regulatory framework related to environmental, health, safety, labour, taxation, financial incentives, or other issues.”5


  1. It is at the same time recognised that doing so can in practice be difficult and it requires resourceful and competent public agencies.
  2. OECD members most recently reaffirmed their commitment at the 2000 Review of the Declaration.
  3. Excerpts from Parts IV.1, IV.2 and IV.3 of the Declaration on International Investment and Multinational Enterprises, 27 June 2000.
  4. Non-member adherents to the Declaration also adhere to the 1984 Decision.
  5. The OECD Guidelines for Multinational Enterprises, Chapter II, paragraph 5.

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