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TitleForeign direct investment with tax holidays and policy uncertainty
Author(s)Azevedo, Alcino
Pereira, Paulo J.
Rodrigues, Artur
Real options
Tax holidays
Taxation policy
Issue date1-Apr-2019
JournalInternational Journal of Finance & Economics
CitationAzevedo, A., Pereira, P. J., & Rodrigues, A. (2019). Foreign direct investment with tax holidays and policy uncertainty. International Journal of Finance & Economics, 24(2), 727-739
Abstract(s)We study foreign direct investment agreements that entitle firms to a lower tax rate during a tax holiday period. Our model considers both finite and uncertain tax holiday period settings. We show that the tax holiday duration may have, for small tax rate reductions, a nonmonotonic effect on the investment timing. For sufficiently high tax reductions, a longer tax holiday speeds up investment. A higher tax reduction during the tax holiday and a lower uncertainty are shown to have a monotonic effect on the threshold, hastening investment. However, in case of a finite tax holiday, for exceptional high salvage values, a higher uncertainty can speed up investment. We show the usefulness of our model to design an optimal incentives package that prompts investment.
Publisher version
AccessOpen access
Appears in Collections:NIPE - Artigos em Revistas de Circulação Internacional com Arbitragem Científica

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