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Foreign direct investment incentive policies in the
Cze c h Republ ic , E st oni a, Hunga r y, P ola nd, Sl ovaki a
and Slovenia
Katalin Antalóczy and Magdolna Sass
first draft
Budapest, February 2001
1
Introduction
Foreign direct investments (FDI) play an important role in the economies of the Czech
Republic, Estonia, Hungary, Poland, Slovakia and Slovenia. The registered FDI inflow
differs from country to country, as well as the strategy and policy of attracting foreign
investors. The countries in question deploy various incentive schemes in order to
attract FDI. The paper analyses the FDI incentive policies of these countries. It is
organised as follows. In the first section, the FDI attracting performance of the
analysed countries is shortly described. In the second section, FDI policies and
incentives are defined. In the third section, the relevance of the listed FDI policy
elements and incentives is investigated on the basis of empirical evidence presented
in surveys and econometric studies on the countries in question. In the fourth section,
elements of FDI incentives are analysed. In the last section, conclusions are drawn.
FDI inflow in the analysed countries
Between 1990 and 1999, foreign direct investments grew dynamically in the world
economy, with the exception of a few years with diminished capital flows due to the
effects of economic recession. The growth of FDI was especially dynamic between
1997 and 1999. In the last ten years, the overall flow of FDI has grown to 4.2 times of
its 1990 value.
Countries of the Central and Eastern European region have opened up their
economies to the inflow of FDI at the beginning of the nineties. Starting from a
negligible level, overall FDI inflows grew quickly, reached their peak by 1996/97 and
from 1998/99 they have started to diminish. In the last decade, the amount of the
inflow grew approximately 38 times compared to its 1990 level. Its share in world-wide
FDI flows – with minor fluctuations – grew until 1995, reaching at that time 4.4 per
cent. In the last two-three years, the relative attractiveness of the region from the point
of view of the inflow of FDI has decreased: in 1999 only 2.6 per cent of total world-
wide flows were directed there. The most important reason for that was, that the most
dynamic part of world-wide FDI flows has been the merger and acquisition (M+A)
activity of companies in the developed countries, thus the share of that group of
countries has become again dominant in the overall flow of FDI (74 per cent of FDI
inflow targeted these countries, compared to a 58-59 per cent of the mid-nineties).
Another detrimental impact on the FDI inflow in the region has been exercised by the
Russian financial crisis, the amount of foreign investments decreased from a 6.6
billion USD level in 1997 to 2.7-2.8 billion in 1998-99. In the same period, the level of
FDI was significantly lower in Romania, Slovakia and Lithuania.
The FDI inflow in the six countries (the Czech Republic, Estonia, Hungary, Poland,
Slovakia and Slovenia), analysed in detail in the paper, has grown 25 fold in the last
decade. At the beginning of the decade, the analysed countries (the Czech Republic
and Slovakia as one country, and Slovenia as part of Yugoslavia) accounted for 90-
100 per cent of total FDI in the Central and Eastern European region, first of all
because these were the first countries to open up their economies, at least partly, for
foreign investors. After other countries appeared in the region in the competition for
2
FDI, the share of the analysed countries has diminished in total regional inflow,
however, in 1998/99, still these six countries accounted for 60-67 per cent of the total
regional FDI inflow. At the mid-nineties, these six countries absorbed 3.3 per cent of
world FDI flows, which represented a relatively high share after only 4-5 years of their
opening up to FDI. However, their share has diminished in world-wide FDI to 1.8 per
cent by the end of the decade.
Among the analysed countries, between 1990 and 1995, Hungary was in the leading
position concerning FDI inflows, starting from 1995, Poland caught up, then became
the first in the region in terms of attracting FDI. Since 1998, the Czech Republic is on
the second place after Poland in that respect. These changes can be explained by the
inclusion of foreign investors into the privatisation deals of the countries in question.
The smaller countries, Estonia, Slovenia and Slovakia attracted smaller inflows of FDI
in absolute terms during the analysed period.
3
Table 1: FDI inflows by countries 1990-1999
199 19 1 199 199 199 199 199 19 19
0 91 992 3 4 5 6 7 98 99
Czech .. .. .. 568 869 2.5 1.4 1.3 2. 5.1
Rep. 62 28 00 720 08
Czechosl 207 60 1 - - -- - - - -
o-vakia 0 103
(former)
Estonia .. .. 8 162 214 201 151 267 58 30
2 1 6
Hungary 311 1. 1. 2.3 1.1 4.4 2.2 2.1 2. 1.9
459 471 39 46 53 75 73 036 44
Poland 89 29 6 1.7 1.8 3.6 4.4 4.9 6. 7.5
1 78 15 75 59 98 08 365 00*
Slovakia .. .. .. 199 245 195 251 206 63 32
1 2
Slovenia .. .. 1 113 128 176 185 321 16 90
11 5
Six
analysed 607 2. 3. 5.0 4.4 11. 8.7 9.1 12 15.
countries 350 445 96 77 246 88 75 .498 270
Growth
(previous
year=100) - 38 1 147 87, 251 78, 104 13 12
7,2 46,6 ,9 9 ,2 1 ,4 6,2 2,2
Central
and Eastern
Europe** 607 2. 3. 5.6 6.1 14. 13. 19. 21 22.
445 847 76 77 558 388 872 .021 892
Growth
(previous
year=100) - 40 1 147 108 235 92, 148 10 10
2,8 57,3 ,5 ,8 ,7 0 ,4 5,8 8,9
Share of
Central and
Eastern 0,3 1, 2, 2,7 2,4 4,4 3,6 4,2 3, 2,6
Europe (%) 6 3 1
Share of
the six
analysed 100 96 8 89, 72, 77, 65, 46, 59 66,
countries in ,1 9,6 8 5 2 6 2 ,5 7
the Central
and Eastern
European
inflow (%)
Total
world FDI 203 15 1 207 255 331 377 473 68 86
812 7773 6812 937 988 844 516 052 0082 5487
2
Growth
(previous
year=100) - 77 1 123 123 129 113 125 14 12
,4 06,6 ,7 ,1 ,6 ,8 ,3 3,8 7,3
Share of
the six
analysed 0,3 1, 2, 2,7 1,8 3,3 2,3 1,9 1, 1,8
countries in 5 0 8
world FDI
(%)
4
* Estimates
** UNCTAD Central and Eastern Europe + Slovenia, Croatia
Source: UNCTAD (1996) (2000), Hungary: National Bank of Hungary
5
At the end of 1999, on the basis of the stock of FDI, Poland was the most important
FDI target with a stock of 30 billion USD, Hungary was the second with a stock of 19.1
billion USD and the Czech Republic the third, with 16.2 billion USD. The smaller
countries, such as Slovenia, Estonia and Slovakia had a much lower stock of between
2 and 3 billion USD.
Table 2: FDI inward stock by host countries 1990, 1995, 1998, 1999 (million USD)
Countries 1990 1995 1998 1999
Czech Republic 1.360 7.352 14.375 16.246
Estonia .. 731 1.822 2.441
Hungary 569 10.007 15.862 19.095
Poland 109 7.843 22.479 29.979
Slovakia 87 1.248 2.502 2.044
Slovenia 666 1.759 2.907 2.997
Source: UNCTAD (2000)
Size and the number of inhabitants differ in the six analysed countries, thus besides
analysing absolute values, it is important to use relative indices in the comparison. The
role of foreign direct investments can be analysed from various viewpoints and can be
compared to other indices.
There have been significant changes in the share of FDI stock in GDP in the analysed
countries between 1990 and 1998. This share is low in 1990 in all the countries,
however, big individual projects elevated the share to relatively higher levels in the
Czech Republic and Slovenia. By 1995 – due to a significant increase in FDI stock,
and partly to a decrease in GDP – FDI stock/GDP reached the highest level in
Hungary and Estonia. In 1998, the latter two countries had still the highest level of FDI
stock/GDP, in the Czech Republic FDI stock accounted for 26 per cent of GDP, and a
third group was formed by the remaining countries, where the share of FDI stock in
GDP amounted to between 10 to 20 per cent. (For comparison, it is important to note,
that in 1998, the value of the same index was 32.7 per cent in Ireland and 20.8 per
cent in Portugal.)
Table 3: Inward FDI stocks as a percentage of GDP by countries 1990, 1995,
1998 (per cent)
Countries 1990 1995 1998
Czech Republic 4.3 14.5 26.1
Estonia .. 20.2 35.6
Hungary 1.7 22.4 33.2
Poland 0.2 6.6 15.1
Slovakia 0.6 7.2 12.1
Slovenia 3.8 9.4 14.5
Source: UNCTAD (2000)
The cumulated FDI stock per capita shows a more even distribution of FDI in the
region, four of the six countries have a value of between 1500 and 2000 USD. The
highest per capita FDI stock is characteristic of Hungary, Estonia has the second, the
Czech Republic the third and Slovenia the fourth highest per capita FDI in the region.
6
The value of the index for Poland is 777 USD, and Slovakia reached the lowest per
capita FDI stock of 379 USD among the analysed countries.
Table 4: Cumulative FDI inflows per capita, as of 1999 (USD)
Countries Cumulative FDI per capita
Czech Republic 1.577
Hungary 1.891
Estonia 1.683
Poland 777
Slovakia 379
Slovenia 1.514
Source: Own calculations based on UNCTAD (2000)
The share of FDI in gross fixed capital formation fluctuates significantly both in the
analysed years and the analysed countries, and there are significant differences
among the analysed countries as well. The fluctuations can be explained on the basis
of the changes in the two elements of the index: the actual changes in the inflow of
FDI and of fixed capital formation. The index can be higher in a given year because of
the relatively high inflow of FDI or because of the relatively low level of fixed capital
formation. In 1995 for example, the index was particularly high in Hungary, because
both the FDI inflow was exceptionally high because of big privatisation deals and
because the overall investment activity was poor.
Table 5: Inward FDI flows as a percentage of gross fixed capital formation by
countries, 1994-1998
Countries 1994 1995 1996 1997 1998
Czech 7.4 15.4 7.7 8.1 17.5
Republic
Estonia 34.8 21.8 12.9 20.6 38.3
Hungary 13.7 52.8 23.6 21.4 18.3
Poland 10.5 15.5 15.1 14.5 15.8
Slovakia 6.1 4.1 3.6 2.7 7.6
Slovenia 4.4 4.4 4.4 7.5 3.5
Source: UNCTAD (2000)
On the basis of the analysed indices, among the six countries, the inflow of FDI
amounted to a significant level in Poland, Hungary and the Czech Republic, and the
role of FDI in the given economies is important in Hungary, Estonia and in the Czech
Republic.
The analysed countries performed differently in the nineties in attracting FDI. There
are factors, which influenced the investment decision of foreign investors, which are
“given”, such as the size of the market, its proximity to the investors‟ targeted markets,
its endowment with natural resources etc. There are other factors, which can be
influenced by the government policy only in the longer term, such as the skill level of
the labour force, the educational attainment of the country, other characteristics of the
labour, capital and goods markets. Policies, affecting the FDI inflow indirectly have a
more immediate effect on the inflow of FDI. Incentives and other policy elements,
7
affecting FDI directly by reducing the costs and risks of the investment also play an
important role in influencing the FDI performance of a given country.
FDI policies and FDI incentives
As we know that foreign investments are usually motivated by a host of different
economic and political factors and economic policy elements, among which only a few
are specifically targeting FDI, we have to distinguish at least two groups of these
elements from the point of view of their importance for foreign investors and from the
point of view of economic policy makers. This latter distinction is made on the basis of
the “target” of the policymakers. Establishing the “normal” environment for foreign
investors and implementing the basic regulatory elements (such as national treatment,
free repatriation of profit etc.) are not included into this analysis. These basic
requirements are in place in each analysed country. If problems exist in that respect, it
will be mentioned in the Annex section, which presents the FDI incentive system of the
analysed countries.
FDI-incentives in broad sense
Empirical studies of FDI show clearly that FDI-incentives in a broader sense
determine how attractive a given country is for foreign investors. The general state of
the economy, its economic, legal and political stability, and its size, its geographical
location and its relative factor endowment are the most important factors for foreign
investors. One of the reasons of the increase in the importance of FDI-incentives in a
broader sense is that the general legal framework concerning FDI-inflow has been
liberalised in most of the countries in the world (UNCTAD 1998,1999), which
strengthened the importance of other macroeconomic policies, which affect
investments indirectly. Previously, in the period of more restrictive FDI-regulations, that
was less important.
Among macroeconomic policies, mostly monetary and fiscal policies determine
economic stability (inflation, external and fiscal equilibrium), capital costs by interest
rate policy and they have an impact on investment decisions and investment types.
Fiscal policy influences the general level of taxes, including the level of corporate
profit tax. Empirical evidence suggests that among two countries, ceteris paribus the
country where corporate profit tax is lower will attract more working capital. The level
of corporate profit tax affects profit repatriation indirectly because where the tax level
is lower, multinational companies usually report higher profits through transfer pricing,
which increases the amount of repatriated profit. The exchange rate policy may
measure stability. It also determines the relative prices of securities of the host
country, the relative amount of repatriated profit, and in the case of export-oriented
investments, the competitiveness of exported goods.
Structural policies play a role in the FDI promotion in a broader sense, for example
through influencing the change of industrial structure, its spatial location, the state of
8
R+D, the composition of economic units. Policies regulating certain factor markets
- like labour market policy - determine indirectly how attractive a country is for foreign
investors. In the same way, policies affecting the quality of labour force, mainly
educational and training policies but also the health policy may have an indirect impact
on the inflow of FDI.
FDI-incentives in a narrow sense
According to UNCTAD (1996), “incentives are any measurable economic advantage
afforded to specific enterprises or categories of enterprise by (or at the direction of) a
government, in order to encourage them to behave in a certain manner.” Thus, FDI-
incentives in the narrow sense consist of those elements of the economic policy that
are aimed at the improvement of the return on FDI, and/or a reduction of its risks
and/or costs. They do not include those non-discriminatory elements of policies, which
provide for a “normal, usual” business environment for investors, such as national
treatment, free repatriation of profits or the general, non-discriminatory regulatory
framework for FDI.
The incentives can be fiscal, financial and other incentives. (OECD, 1989) Fiscal
incentives are aimed at reducing the tax burden for the foreign investor, by giving tax-
holidays, tax reductions or tax rebates for certain types of taxes, depending or not on a
performance or other requirement. Fiscal incentives can be exemption from the value-
added tax, import duties and fees, or corporate tax relieves and holidays, or capital
based incentives or deduction of promotional and advertisement costs or possibility to
carry forward losses. (Mah, Tamulaitis, 2000) Financial incentives provide direct
financial support, access to subsidised loans, loan guarantees or defray capital or
operation costs for the foreign investment enterprise, thus reducing the overall costs of
the investment. Other incentives include various measures, the aim of which is to
increase the profitability of the foreign investment by non-financial means. This may
include inter alia the provision of infrastructure, services at subsidised prices, or
provision of market share by e.g. granting monopoly rights, or preferential treatment
on foreign exchange. Incentives can be offered by governments, government
institutions and local municipalities. In terms of offering other incentives, the reduction
of risks of the investment can be realised by using information provided by NGOs,
chambers of commerce and other organisations.
Capital flows are determined by factors influencing FDI in a broader sense. The FDI
enhancing role of incentives in the narrow sense is widely discussed in the literature
and empirical evidence is inconclusive concerning the impact of incentives on FDI
flows. Most authors are of the view that these factors play a role in the attraction of
investments, but this role is not determining. The size of the market, the rate of
economic growth, changes in relative production costs, skills and relative costs of
labour, political and economic stability, the regulatory framework, economic policies
affecting FDI indirectly are the most important from the point of view of investment
decisions. Incentives in the narrow sense may play a role in choosing between
locations inside a region, which are otherwise performing similarly. Then, the location
(in the targeted region or even inside a country) with more generous or more attractive
incentives gets the investment.
9
Empirical evidence on the role of FDI incentives in the analysed countries1
Empirical evidence suggests similar trends in the analysed countries as for other
countries in the world: FDI is attracted more by the FDI incentives in a broad sense
than by those in the narrow sense. However, since all the countries established similar
regulatory framework and a working market economy environment, the impact of
incentives in a narrow sense can be traced in some cases in diverting bigger FDI
projects regionally to the location with the most generous incentives.
FDI is primarily attracted by the size of the market and by its potential growth.
Depending on the size and growth of the relevant market, FDI in various sectors is
attracted to the countries of the region. Where the size of the relevant market is
smaller than the actual country size, foreign investors appear in all the countries (e.g.
retail trade, production of construction materials etc.). In other cases, also the size and
the growth potential of the market is an attracting factor, when the relevant market is
bigger than the country size, but trade turnover is virtually liberalised in the confines of
the relevant market. Thus, membership in free trade areas, preferential trade
agreements with certain partner countries may affect the inflow of FDI. This is
especially relevant for export oriented investments in the manufacturing sector. This
incentive can be part of the incentives in a broad sense, because several economic
policy elements help to liberalise the market, to make it solvent and make its growth
prospects bright, and to make it bigger by regional liberalisation efforts.
Market size, domestic market and growth potential was found to be important as an
FDI attracting factor by surveys (e.g.EBRD (1994) Indicator (1995), Lankes and
Venables (1997), Pye (1998), Éltető and Sass (1998) for Hungary, Witkowska and
Wysokinska(1998) for Poland, Altzinger (1999)) and by econometric studies (Gronicki
(1999) for Poland, Sass and Szemlér (1999) for Hungary and Barrel and Pain (2000)
for Poland, Hungary and the Czech Republic) for direct investments in the countries in
question. Proximity to big markets, especially to the European Union was considered
to be important by the investors in certain surveys, however, in some cases this was
important from the point of view of efficient and low-cost intra-firm trade. Éltető and
Sass (1998) found that for assemblers and other export oriented investors, lack of
trade barriers (especially towards the EU) was an important factor in Hungary.
Relative factor endowments and factor costs, and inside that, labour costs related to
skills are also found as being of primary importance from the point of view of the direct
investment decision in the analysed countries. Lack of capital and relatively low labour
costs from the point of view of the investing countries presumes that relative factor
costs may play an important role in attracting FDI to the region. As an incentive in a
broader sense, for example wage policy, labour market regulations, education policy
may be relevant from that point of view.
Certain surveys found that labour costs are important, but put only on the second
place after exploiting the market potential by Konings and Janssens (1996) and
Altzinger (1999) for Austrian investors in the region. Numerous surveys indicate that
skilled labour is one of the main attracting factors for FDI in the analysed countries.
(See e.g. Meyer (1996), Lankes and Venables (1997), Savary (1997) for French
investors, Wysokinska and Witkowska (1998), Pye (1998).) Other surveys, such as
1
T hi s p ar t re li es o n Ho ll and , S as s, B e nac e k, Gro ni c ki (2 0 0 0 ).
10
Lankes and Venables (1997) and Éltető and Sass (1998) for Hungary found that
labour costs were of special importance for export oriented foreign investments.
Robust econometric evidence is missing, but certain studies found that relative labour
costs in transition economies compared to the developed countries (e.g. Sass and
Szemlér (1999) for Hungary), relative labour costs among individual transition
economies (e.g. Lansbury et al. (1996)) or relative labour costs among sectors within
a country (e.g. Gronicki (1999) for Poland) play a role in the investment decision.
However, it is still an unanswered question, to which kind of labour cost the foreign
investor compares the labour costs in the given potential investment location.
In the reform process, in all the analysed countries, privatisation policy played a
pivotal role. The analysed countries applied various privatisation policy mixes, and
thus some of them offered one-off opportunities for foreign investors to a certain
extent. Not only privatisation for foreigners matters but also the speed and scale of
adjustment (Hunya, 1997), which determines how quickly a functioning market
economy is established in the analysed country. From that point of view, besides the
privatisation policy, other economic policy measures, the aim of which is to help
creating a functioning market economy can be part of incentives in a broad sense.
While surveys could not find evidence for the importance of privatisation policy,
relating FDI and privatisation revenue suggest it played an important role in the case
of the FDI inflow in Hungary up till 1996 and for Poland and the Czech Republic more
recently. In the smaller analysed countries, cases for privatisation to foreign investors
can also be found, however, in Slovenia only more recently. (Hunya, Kalotay, 2000)
Econometric studies found the size and the share of the private sector important from
the point of view of FDI inflow in the region (Lansbury et al., 1996; Gronicki, 1999 for
Poland and Barrel and Holland, 2000), while according to the study by Holland and
Pain (1998), the privatisation method is more important than the private sector share
in the economy.
The level of the economic and political risk in the host economy plays an important
factor in the investment decision. Economic risk may be proxied by the stability
indicators of the economy, but also, given the special circumstances of transition, the
stability of the legal and regulatory framework can also be important for the foreign
investor. This latter can not be measured by the same indicators. These factors also
belong to FDI incentives in a broader sense.
As for surveys, Meyer (1996) for more countries in the region and Éltető and Sass
(1998) for Hungary found that political and economic stability was one of the main
attracting factors for domestic market oriented foreign investors. Witkowska and
Wysokinska (1998) found that foreign investors mentioned a measure of economic
“instability”, high inflation, as one of the most important deterring factors for investing
in Poland. Lankes and Venables (1997) measured risk with the EBRD transition
indicator, which includes “regulatory” risk as well, and they found that high risk plays
an important role in abandoning an FDI project. Econometric studies, such as Holland
and Pain (1998) and Barrel and Holland (2000) found risk (measured by different
indicators) an important factor in determining FDI distribution among certain transition
economies.
Investment incentives in the narrow sense may attract FDI, or as the theory suggests,
may induce the investor to choose the location offering more generous incentives,
11
everything else being equal. Neither surveys, nor econometric studies could find
evidence for the role investment incentives would play in attracting FDI to the
countries in question. According to Lankes and Venables (1997), tax incentives did not
influence the investment decision in the region to a significant extent. Similar results
were reported by Éltető and Sass (1998) for investment in Hungary. However, case
studies (see e.g. Antalóczy, 1997) suggests, that big investment projects in Hungary
usually benefit from generous government support (financial and fiscal incentives),
which are in many instances negotiated on a case by case basis. Similar statements
were made on Poland, the Czech Republic and Slovakia. (Mah, Tamulaitis, 2000, p.
236-237) On the other hand, surveys and econometric studies did not take into
account neither the impact of special incentives (e.g. customs free zones, industrial
parks) nor the role of local fiscal, financial and other incentives, offered by
municipalities. Even other “incentives”, such as protection from import competition,
granting of monopoly rights etc. were not analysed, however, these also played a part
in attracting FDI, especially in the first half of the decade. (Mah, Tamulaitis, 2000)
It is evident from the empirical studies, that FDI incentives in the narrow sense are of
secondary importance for foreign investors. They are much more concerned with the
overall economic and political stability of the country, the size and growth prospects of
the relevant market and growth prospects of the relevant market. For export oriented
investors, factor costs (especially that of skilled labour) are of primary importance as
well as proximity and free access to markets. However, according to empirical studies,
they can be influenced by incentives when choosing from otherwise identical locations
(Bergsman, 2000). The factors found important for foreign investors in the theoretical
literature and in empirical surveys and econometric studies, can explain to a large
extent the pattern of the direct capital inflow in the analysed countries.
Similarities and differences in the FDI policies of the
anal ysed countries
The Annex contains detailed information on the FDI incentive policies of the analysed
countries. The Annex Table helps to compare the most important characteristics of the
FDI incentive systems of the countries in question.
Regulatory framework for FDI and incentives
By the end of the decade, in all the analysed countries, even in the most reluctant
Slovenia, there is a functioning investment incentive system in place. This is partly a
sign of the more intense competition for foreign investments among the countries of
the region, which induced even those countries to introduce an investment incentive
system, which up till that time did not deploy one. The most reduced form of the
investment incentive system is characteristic of Estonia.
All the countries put in place the institutional base for investment promotion. All have
an investment agency, which is sometimes not separated from the export promotion
institution. In all cases these institutions are aimed to be a kind of “one-stop-shop”,
providing not only all the available information for the potential investor, but acting also
as a mediator between the potential investor and government institutions in
negotiating incentives.
12
The legal and regulatory framework is also in place by now in all the countries.
Slovenia was the last among the analysed countries, which reached the same level of
liberalisation of FDI inflows, which is characteristic for the other countries. The trend
concerning the handling of foreign direct investments seems to be different in Slovenia
and in the Czech Republic and Slovakia on one hand, and Hungary and Poland on the
other hand. These latter analysed countries applied a generous incentive system
towards foreign investors, the generosity of which has been gradually reduced. In the
three countries, at the beginning, foreign investments did not receive any special
attention and any special incentive, while at the end of the decade, they receive
similar incentives as in other countries of the region. In the case of these countries,
the introduction of a relatively generous incentive package acted also as a signalling
device towards potential foreign investors, signifying the change in the FDI policy of
the given country.
The exception in that respect is Estonia, where during the analysed period,
consequently, only a very limited range of incentives has been applied. This calls the
attention to another feature of the incentive schemes in other analysed countries,
which is a relatively frequent change in certain elements of the incentive policy during
the nineties. This introduces instability into the FDI environment, makes
administratively difficult to handle the investment regime and gives the impression of a
complicate and too complex FDI environment for the foreign investor.
Obligations due to (future) membership in international organisations or in integrations
influenced the incentive policy in two ways. On one hand, while it was more
characteristic in the past, it is still true, that a few elements of investment incentive
schemes are still not compatible with the WTO regulations, or in some cases with EU
regulations: e.g. export performance requirements are still present in certain schemes
(Poland), discriminatory exemptions from the customs duties on imported machinery
(HS Sections 84 and 85) (Czech Republic and Slovakia), possibility of accelerated
depreciation only for certain high tech goods (Czech Republic, Hungary, Slovenia),
special economic zones (Poland and especially Hungary‟s free trade zones).
On the other hand, together with the gradual reduction of trade barriers in
manufacturing towards the most important trade partners, the importance of the
granting of protected markets, which was an important tool of attracting FDI and more
relevant at the beginning of the decade (see e.g. the example of the car industry) has
been diminishing. This can be still relevant in certain service sectors. (See e.g. the
telecom, or certain public service privatisation in the analysed countries.)
Characteristics of FDI incentive policies
The generosity of the incentive systems can not be measured, because of the missing
impact studies, the missing information on negotiated incentives, offered on a case by
case basis by central governments and municipalities as well. Moreover, no data on
foregone budget revenues exist. However, while tax allowances are much more
limited in the developed countries, their financial incentives are of a much greater
magnitude than those applied in these countries. Moreover, certain developing
countries (in Asia and Latin America) offer similar or even greater incentives
(especially tax holidays), than the countries in question.
13
With the exception of Slovakia, incentives are all open to both foreign and domestic
investors, thus, national treatment is granted. Not only economic rationale says that
investors must be treated equally, but also the experience of other countries, like
Hungary or Slovenia with offering tax holidays only to foreign investors and seeing the
formation of a large number of “phantom” joint ventures, which on paper meet the
requirements for the incentives, but they are simply the same domestic companies
with a (silent) foreign partner, who latter brings neither further investment, nor
technical or managerial know-how.
In all the countries, with the possible exclusion of Estonia and Slovenia, the biggest
projects enjoy special treatment, and they can negotiate special, in some cases
“taylored” incentives for themselves from the central and local governments. While this
special treatment of large projects has its problems, it must be admitted that similar
practice is applied in other parts of the world.
As for fiscal incentives, parallel with the world-wide trend (see e.g. UNCTAD, 2000),
according to which developed countries offer more financial incentives and developing
and transition economies apply more fiscal than financial incentives, in five of the six
analysed countries (the exception is Estonia), tax allowances, tax holidays,
exemptions from duties and accelerated depreciation, i.e. fiscal incentives (in some
cases combined with other incentives) are the most important elements of the
incentive system.
While national treatment is granted (except for Slovakia), and thus in principle
incentives are open to both foreign and domestic investors, in most of the cases (such
as in the Czech Republic, Hungary, Poland and Slovakia), with setting the minimum
investment level, preferences are given to large projects, which ab ovo offers a better
position to be eligible for receiving the allowances, grants etc. for large (or medium
sized) foreign investors. It is also evident from published data, that it is almost
exclusively this type of investor, which enjoys the most benefit of the incentives. It is
also evident, that similarly to world-wide trends, very large investment projects get a
discretionary treatment and special incentives in the analysed countries as well, as it
was already mentioned in the section on Empirical evidence on the role of FDI
incentives in the analysed countries.
As for the period of tax reduction or tax holidays, usually two periods (5 and 10 years)
are applied (as in the Czech republic, Hungary, Poland? and Slovakia). The ten-year
period is granted usually for large projects, fulfilling certain criteria (e.g. investing in
certain sectors or areas, or for new projects in the Czech Republic).
Fiscal or other incentives are effective, for footloose export-oriented investments; in
the case of countries or regions which are similar to neighbouring countries or regions;
in countries where otherwise the business climate is favourable (incentives are a plus,
not a compensation); and where incentives are offered sooner in the investment
project‟s life and with more certainty (Bergsman, 2000). As empirical evidence shows,
(Clark, 2000), small or less attractive countries that are competing for export-oriented
investments, should apply a relatively low effective corporate tax rates in order to
attract this kind of investments. While the profit tax is of the same magnitude in the
analysed countries (in the range of 25 per cent (Slovenia) to 31 per cent (the Czech
Republic) with the exception of Hungary, where it is 18 per cent), the effective tax rate
for companies with foreign participation is much lower on average in the Czech
14
republic, Hungary, Poland and Slovakia, because of tax holidays and tax reductions,
which are currently in force.
Tax incentives can reduce the host country corporate income tax rate applied to the
profit of the domestic investment (such as in the Czech Republic, Hungary, Poland,
Slovakia, Slovenia). According to the lists of requirements, usually newly established
firms (in the Czech Republic), investments in certain activities or sectors (the Czech
Republic, Hungary, Slovakia), investments in certain regions or zones (Hungary,
Poland, Slovenia) or investments above a certain threshold level (the Czech Republic,
Hungary, Poland and Slovakia) are qualifying for the tax incentives.
Tax holidays are offered in the Czech Republic, Hungary and Slovakia. However, as
the literature shows (Bergsman, 1999), these have maximal effect on footloose, short
term investments, which may leave after the tax holiday expires. They have relatively
little additional benefits, in terms of using domestic suppliers, technology transfer,
labour training etc. However, certain domestic policy elements may help embedding
these investments into the host economy by enhancing its backward and forward
linkages and make it either less footloose or induce the investing company to transfer
other activities to the host economy after the footloose part leaves.
A preference for new investment projects seem to emerge in the FDI incentive
systems of the analysed countries, with the exclusion of Estonia and to a certain
extent of Hungary. The minimum level of investment for qualifying for the incentives,
and the similar tax level of reinvested and distributed profits seem to underline this
approach in the analysed countries. In some cases, the law says expressis verbis that
only newly established companies can get or only these can get longer tax holidays.
(For example in the case of the Czech Republic.) In general, new investments prefer
incentives that reduce their initial expenses (Bergsman, Edisis (1988)), on the other
hand, expanding firms are benefited more by profit-related incentives, i.e. by those
which reduce the tax burden on the profit, on top of that, expanding manufacturing
firms, which invest more in fixed assets, are “grateful” for incentives related to
depreciable assets. Thus offering tax holidays attract more new investments, while
existing investments and their capacity expansion is promoted more by good loss-
carry-forward provisions, faster depreciation and other write-offs or tax allowances,
and lower tax rates for reinvestment. Loss-carry-forward provisions are present in the
regulatory framework in all the analysed countries, while accelerated depreciation is
possible everywhere except for Estonia.
Accelerated write-offs are especially relevant for transition economies, because in
high inflation countries this can be a tool for offseting the tendency for capital to be
overtaxed. (Clark, 2000) Moreover, accelerated depreciation reduces the cost for the
investors and induces them to invest in new machinery, equipment, building, etc.,
depending on the relative rates of depreciation of these items. The highest
depreciation rate is applied in Slovenia: 50 per cent for computers. Otherwise,
depreciation rate for buildings is the smallest (around 5 per cent), and the highest for
machinery (around 20-25 per cent). Hungary has a dispersed set of depreciation
rates, separated into five distinct product groups and ranging from 2 % (certain
buildings) to 33 per cent (technical machinery).
Loss-carry-forward provisions are important from the point of view of foreign investors,
because in the first years of activity, when tax holidays or tax reductions are in effect,
the new investment usually makes losses, and turns to profitable only after a few
15
years of activity, in some cases only when the tax incentives expire. Moreover, in
some industries, firms may experience wide fluctuations in their annual earnings.
Usually, the carry-back and carry-forward provisions are limited to a certain period: the
Czech Republic offers a relatively long period of 7 years, other countries apply 5
years.
As the abolition of import duties is a loss from the point of view of fiscal revenues, and
on the other hand, for the foreign investor this causes a reduction in the cost of the
investment, thus it is perceived as an incentive and can be found in the group of fiscal
incentives. (Estonia is an exception here, because it has virtually no export-import
duties.) Now only Poland offers the duty free import of contribution in kind for foreign
investors. The Czech Republic and Slovakia abolished import duties on high tech
machinery and equipment. All countries use outward processing regulations for
relevant industries, which makes possible the duty free import of inputs and duty free
exports of outputs assembled from the inputs. Companies operating in special
economic zones (in the group of other incentives) in Estonia, Hungary, Poland and
Slovenia, (Czech Republic?, Slovakia?) do not pay customs duties and VAT on
imported inputs which are exported later. The special regulation of the industrial free
trade zones in Hungary allows the duty and VAT free import of contribution in kind for
companies operating in these zones.
Reduced taxes or other charges on the wage bill can be an important incentive for
FDI, especially when one of the attracting factors is the skilled labour force. However,
even with the tax burden the wages in these countries seem to be competitive enough
to attract foreign investors. Thus these kinds of incentives are not applied. Job training
and job creation grants are used, but these belong to the category of financial
incentives.
Financial incentives are less important compared to fiscal incentives. Their amount per
project or per created job is much smaller compared to the ones offered by developed
countries. (Antalóczy, Sass, 2000) Similarly to fiscal incentives, financial incentives are
also applied alongside certain criteria which try to divert FDI to certain sectors
(Estonia: innovative projects, R+D; Czech Republic: environmentally friendly projects,
R+D; Hungary: agriculture, environmentally friendly, R+D) or certain regions (Slovenia,
the Czech republic, Estonia (rural areas)). Certain activities are also supported by the
governments, especially SMEs or job creation and training (the Czech republic,
Estonia, Hungary, Slovenia). (In Hungary, support for SMEs is given only to Hungarian
companies, this is an official exception from national treatment.)
As for other incentives, they have become widely used in all the analysed countries.
Investment agencies operate everywhere, as it was already mentioned. Special zones
(either free zones or economic zones) seem to be an important tool for attracting FDI,
by separating this area from the domestic economy and thus reducing mainly the risk
(and costs) of the investor. Free trade zones exist in all countries, mostly of
commercial type. Hungary operates a network of industrial free trade zones, which is
one of the most important attracting factors for export-oriented (greenfield)
investments. (Antalóczy, Sass, 2000) Similarly, Poland operates a network of special
economic zones.
In Hungary up till now and in Poland in the future (and in Estonia) special economic or
customs free zones are or are planned to be the most important locations for foreign
investors. Either special preferential regulatory framework (Hungary), or the
16
concentration of existing fiscal incentives (Poland) or the relative importance of the
zones because of lack of other incentives have increased or may increase in the
future the importance of these zones, which have a significant risk and cost reduction
impact. In these cases, fiscal and financial incentives are combined with other
incentives.
FDI policy used for other policy aims
The measurement of the efficiency of FDI policy in the analysed countries is made
complicated by the fact that the countries in question try to attain other than FDI aims
(i.e. not only the increase of FDI inflows) with the use of FDI incentive policy tools. In
normal circumstances, it is questionable if FDI incentive policy is the best to achieve
these aims. However, in the case of these economies, where (new) investments
mainly come from foreign investors, the problem is more complex, and the answer is
not s straightforward „no‟.
In all the countries, there are preferred sectors to which foreign investments are tried
to be directed. The list of these sectors is more or less obvious from the investment
incentive schemes. However, the level of aggregation to which these sectors are
specified differs from country to country. Some countries do not distinguish subsectors
inside the manufacturing industry, while others give a list of preferred subsectors.
Usually, high tech sectors, sectors with higher value added and sectors, deemed to be
of strategic importance or of “national” importance (e.g. based on industrial traditions)
for the government are given on the list of preferred sectors. Thus, FDI incentives are
used in some cases as an industrial policy tool as well. Their aim is not only to attract,
but more to attract FDI into certain industries, thus influence the sectoral structure of
FDI inflows.
Regional policy aims in terms of improved regional distribution of business activities
and that way an improved regional distribution of incomes are also targeted by certain
elements of FDI incentive policy. Disadvantaged regions are not so well placed for FDI
as their counterparts close to major urban or industrial centres. Distance of these
regions from the major economic centres of a country usually means higher costs for
the investor in terms of transporting raw materials, parts and components and final
products from and to the major markets. Moreover, in some cases these regions are
not well endowed with skilled labour, which can result in higher costs (in terms of
higher compensation) in attracting skilled workforce there. Some analysed countries
(such as the Czech Republic, Estonia, Hungary, Poland and Slovenia) try to divert FDI
flows to the less developed regions of the country, or to regions with higher than
average unemployment. In order to achieve that goal, they use fiscal incentives (tax
holidays or tax reductions for investors investing in less developed areas), financial
ones (targeted allocations) or other incentives, such as cheap land, industrial parks,
special zones etc. The countries in question do not limit the incentives (except for
Slovenia? or Poland in the future?) to less developed regions, but they use more
generous incentives to attract FDI into these areas. Less developed regions in some
cases are defined as areas with high unemployment. In that respect, the FDI incentive
policy of giving preferences to investors in these regions can be evaluated as and
active labour market policy tool.
FDI incentive policy can act as a tool of R+D policy as well. This is relevant for almost
all among the analysed countries (the exception is Slovakia). The importance of R+D
17
policy is especially relevant for a country in transition, where there has been a strong
decrease of (state-financed) R+D activity in the nineties. Foreign investors, who bring
in new technologies can be a good group to target in order to increase R+D activities
in the country. Moreover, the presence of externalities in terms of technological
spillovers can make relevant the use of FDI incentives for this reason.
The achievement of certain macroeconomic policy goals can also be the aim of the
implementation of various FDI incentives. In the case of some transition economies
with a high stock of foreign debt at the beginning of the reform process, or with
growing foreign trade or current account deficit during the nineties, the inflow of FDI
was crucial in terms of reducing certain macroeconomic imbalances. For example, the
inflow of export oriented investments, while in the short run contributes to the deficit of
the current account, in the longer run produces an export surplus. Export oriented
investors are especially sensitive to incentives (Bergsman,1999), especially when
deciding among similarly attractive platforms for producing for exports. Some more
recent empirical evidence suggests that there is a correlation between the location of
FDI and the corporate tax burden. (Clark,2000) Targeted incentives for export oriented
investors can promote the competitiveness of the products of the host country and its
access to foreign markets, which has a beneficial effect on the current account.
Among the analysed countries, the change in the emphasis of FDI incentive policies in
terms of targeting export oriented foreign investors can be traced in the more
widespread use of special economic zones. Examples here are Hungary and Poland.
A problem here can be that footloose export-oriented investors are attracted by
generous incentives, and they easily move and transfer their production to other
countries, when the generosity of the incentives decreases (e.g. the tax holiday
expires) or when production costs grow (the main part of which is usually the relatively
cheap labour). Thus, to foster links with the host economy (e.g. in terms of domestic
suppliers) becomes part of the FDI policy in order to keep these export-oriented
investments in the host economy.
The relationship of using FDI incentive policies to attain other policy goals can be
relevant the other way round as well, i.e. using other than FDI policies to increase the
inflow of FDI. While it can not be perceived as an incentive per se, for example
privatisation policy influenced and influences the inflow of FDI to a great extent in a
number of the analysed countries, as it was already mentioned.
Local municipalities
The description and analysis of FDI incentive policies in the countries in question is
made even more complicated by the fact that local municipalities offer all kinds of
incentives, sometimes even more generous ones compared to the incentives offered
by the government.
These incentives are not recorded or co-ordinated centrally and seem to be negotiable
on a case by case basis. This is not contradictory to world-wide trends, in which the
role of regional or local governments is becoming more and more important in offering
incentives for capital investments.
18
Conclusion
19
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22
Annex
Description of FDI incentive policies in the analysed
countries
Each analysed country deploys a set of policy elements, which can be identified as an
FDI incentive policy. Beside a more detailed description given in this section, the
Annex Table presents a comparative portrait of the FDI incentive policy tools
implemented in the analysed countries.
The Czech Republic2
The programme of investment incentives was introduced in the Czech Republic in
April 1998. In 1999, the incentives were amended by an increase in the job creation
grants and a decrease in the required minimum value of investment. Since May 2000,
investment incentives are offered to both domestic and foreign investors on the basis
of a new Investment Incentive Act.
The eligibility criteria at present are the following. Investment in high tech
manufacturing sectors listed in the act or investment in other manufacturing sectors
provided that at least 50 per cent of the cost of the production line consists of
machinery listed on the government approved list of high tech machinery can benefit
from the incentives, as well as investment in the acquisition or construction of a new
production plant or in the expansion or modernisation of existing production facilities to
launch a new production activity. Sectors, in which the tax allowance is not available:
metallurgy, electric energy, gas, water, construction, after-sale services for passenger
cars, retail and wholesale trade and other services. The value of the investment must
be at least .CZK 350 million (approximately USD 10 million), and in regions with high
unemployment, the minimum investment requirement is reduced to CZK 175 million
(approximately USD 5 million). Investors equity must account for at least CZK 145
million (approximately USD 4 million). Investment in machinery must account for at
least 40 per cent of the total investment. The proposed production must meet all the
Czech environmental standards.
The incentives offered for the investment projects meeting the above criteria are the
following. As fiscal incentives, relief on corporate tax for 10 years (for newly
established companies, legal entities and natural persons), or partial discount of
corporate tax for 5 years (already existing legal entities or natural persons). On top of
that, as financial incentives, companies fulfilling the above criteria, may receive job
creation grants and training grants. These are certain regional incentives, which are
available from the Ministries of Finance and Trade and Industry on a case by case
basis for projects involving job creation or technology transfer in disadvantaged
regions. Grants are given to job creating investments, the per job value depends on
the region where the new investment is located. (Four regions exist with differing
unemployment rates.) Further grants are given, on the same basis, for retraining, up to
50 per cent of the training costs. Moreover, low cost building land and/or infrastructure
2
B as ed o n FDI S ur ve y o f t he Cz ec h Rep ub li c, OE CD , fo rt h co mi n g a nd i n fo r mat io ns fro m
ww w. cz ec h i n ve st. co m.
23
support is provided. The scheme was designed under the supervision of the EU
Monitoring Authority and complies with general rules on public aid.
The depreciation rate is uniform: 25 per cent for machinery and 4 per cent for
buildings. As another fiscal incentive, certain imported machinery are exempt from the
import duty. These items belong to the HS 84 and 85 sections, they must be of higher
value than 10 million koruna, can not be older than 1 year, can not be sold or rented
for 4 year.
Local municipalities also offer various incentives (usually infrastructure support, cheap
land, industrial parks, etc.) to foreign investors.
As far as other incentives are concerned, customs free zones and a network of
industrial zones have also been developed in the Czech Republic. Under this scheme,
the municipalities receive government subsidies to co-finance the development of
these zones. Transfer of land from the National Land Fund to the municipality at a
discounted price or government subsidy to the municipality for the purchase of land
from other owners is also possible.
According to data published by Czechinvest, 23 companies benefited in 1999 from the
scheme, with another 10 companies added to the list by the end of May 2000. These
companies created 15000 jobs and include well known foreign companies such as
Volkswagen, Schoeller, Matsushita, Philips or Continental. In 1999, the government
provided USD 4.5 million to 18 municipalities to create almost 360 hectares of fully
serviced industrial zones and a further USD 11 million is planned to be invested in
2000. These industrial zones account for the overwhelming majority of greenfield
investments in the Czech Republic, including investment projects by Matsushita (TV
set production), Philips (TV screen production) and Tyco Electronics (cable
production).
The Czech investment agency, the Czechinvest was set up by the Ministry of Industry
and Trade in 1992. It assists foreign investors in establishing or expanding
manufacturing operations throughout the country. It concentrates at present on the
greenfield, brownfield and joint ventures projects in the manufacturing sector, but
plans to expand its activities to the service sector as well. It provides information and
data to potential investors, helps to find potential domestic partners and processes
incentives applications.
Estonia
Estonia differs from other countries in the region, because in accordance with the
liberal, non-interventionist stance of the economic policy of the Estonian government,
only a few investment incentives are applied. These incentives are accessible to both
foreign and domestic economic actors. Fiscal and financial incentives are less
important compared to other countries of the region. (Hirvensalo, 2000, p. 12)
In terms of fiscal incentives, taxes on reinvested corporate earnings were abolished at
the beginning of 2000. (Up till then, both foreign and domestic companies in the
country paid the same 26 per cent tax.) Tax holidays – with a few exceptions – were
abolished, e.g. certain technology related VAT reductions were also abolished by the
24
new government. Performance requirements were applied in the context of
privatisation, both for foreign and domestic investors. In privatisation related
transactions, foreign and domestic investors are exempt from all state taxes and fees.
(Bergsman, 2000, p. 11) Another fiscal incentive is a tax concession, when companies
investing in certain regions can deduct expenses from taxable income, which are
spent on upgrading or acquiring fixed assets.
As for other incentives, special zones can be considered as a special tool of FDI
promotion. Four special zones were established in Estonia, but only one, the Muuga
port is operational at present. Free zones in Estonia are duty free zones inside a
customs territory. The Estonian Customs Law allows for the establishment of a free
zone within the customs territory by a government decree. These zones offer duty
exemptions and other incentives for export oriented investments, both foreign and
domestic. Value added activity in the zones is limited to simple marketing preparations
such as labelling, sorting and packing, or measures to maintain the quality of the
good. The Muuga port zone, which was established in 1997, is emerging as one of the
most important transit hubs of the region due to these regulations. The other three
non-operational zones were established in 1999, and they are located in high
unemployment regions. They are more similar to an industrial zone, because
production, assembly and other industrial operations are permitted. Companies here
are to be engaged in the processing of imported inputs for exports. (Berghall, 2000, p.
85)
The Estonian Investment Agency was established in 1994, and it operates now under
the auspices of the Estonian Trade and Investment Board. The agency is financed
from the budget jointly with the EU Phare Programme. Its main task is to supply
potential investors with information, find potential domestic business partners and
locations. Several industries are covered by the database of the agency, such as the
electronics, food processing, wood and paper sectors. (Berghall, 2000, p. 90)
In terms of regional co-operation, Estonia participates in an intra-Baltic co-operation,
which up till now materialised in the publication of joint promotional material and
Internet sites. This approach is justified on the basis of the fact, that, partly given the
smallness of the individual countries, foreign investors handle the region as a unity.
Hungary3
Hungary operates a complex set of incentives, including fiscal, financial and other
ones. These are open to both foreign and domestic investors. Their aim is not only to
increase investments, but to divert them to selected sectors, activities and locations.
While fiscal incentives are still in place, the majority of them will be phased out in the
near future. The corporate tax law and the law on dividends contain the requirements
and conditions of obtaining a tax relief. Investments in production facilities and hotels
with an amount exceeding 1 billion HUF may receive a 50 per cent tax allowance for 5
years (100 per cent for investments in priority regions (with high unemployment rates)
or in entrepreneurial zones, creating more than 100 jobs or 100 per cent for ten years
3
B as ed o n t h e FDI S ur ve y o f H u n gar y (2 0 0 0 ) O E CD , P ari s a nd T he re g ul ato r y re fo r m i n
H u n gar y (1 9 9 9 ) OE C D, P ar is a nd i n fo r ma tio n fr o m t he fo llo wi n g web s it es : www. i td . h u a nd
ww w. g m. h u.
25
for investments with an amount of more than 10 billion HUF and creating at least 500
jobs in the second year of operation), provided that the increase in sale revenues
exceeds a set minimum level. The same allowance is available for companies
undertaking an infrastructure project in such regions in the year when the project is put
into operation. A corporate tax allowance is available for research and development, in
the extent of a 20 per cent deduction from the tax base of the direct costs linked to
these activities.
The rate of depreciation is 2 to 6 per cent for buildings, 33 per cent for machinery
(technical), 20 per cent for vehicles and 14 per cent for other machinery.
The so called targeted allocation for economic, technological and rural development,
the labour market fund and the schemes for the development of tourism,
environmental protection and agricultural activities constitute the framework for
financial incentives. They are open both to foreign and domestic investors and already
established enterprises regardless of their ownership structure in terms of foreign
participation. Financial incentives take the form of grants, preferential credit schemes
and are available through a tendering process. (Since 2000, the targeted allocation for
economic development is not available for preferential credits.) There is a special
programme providing below market rate credits for SME development, which is not
open to foreigners, while another special programme for suppliers of big companies
with foreign participation is open to all domestically registered suppliers.
As for other incentives, the regulation and existence of industrial free trade zones
must be mentioned. The regulation is unique: any company can set up its own zone
without geographical restriction of any kind and can bring in high value equipment for
their own use, free of duty. This regulation attracts mainly export oriented assembling
companies, which use first of all relatively cheep and skilled local labour. However,
the importance of this regulation is decreasing together with the establishment of duty
free trade in industrial and certain agricultural products with the majority of Hungary‟s
most important trading partners. Moreover, a number of industrial parks has been
established in the country. These offer developed infrastructure, services and local tax
allowances. The Ministry of Economic Affairs operates a programme, which provides
support to the establishment of industrial parks relying on local initiatives.
Local governments, municipalities also offer tax holidays and other incentives.
Incentives include exemption from local tax, preferential real estate prices for newly
built production facilities, elements of infrastructure provided free of charge or at
preferential rates, etc. These are of the competence of the local authorities, and are
not included into the scheme of central government incentives.
The Investment and Trade Development Agency of Hungary was established in 1993
by the Ministry of Economic Affairs. It acts as a one-stop-shop for foreign investors,
providing information, data and connections to the Ministry. Other organisations (such
as chambers of commerce, local governments etc.) are also involved in certain
investment promotion activities. The Ministry established in 1996 the Investors‟
Council, members of which represent at present about 70 per cent of invested capital.
Poland
26
In Poland, the present incentive programme has been in force since the beginning of
1999. It was modified several times. Both foreign and domestic economic actors have
access to the incentives providing they fulfil the relevant requirements. The incentive
programme is complex and can be characterised with very specific targets.
Fiscal incentives contain tax allowances. These are available for both domestic and
foreign investors, who fulfil certain conditions and performance requirements. First, tax
allowances are available for investors, investing at least 2 million euro. They can
deduct the invested amount from their pre-tax income, but the deduction must not
exceed 10 per cent of the total tax base. Second, the costs of the investment can be
deduced from the tax base up to 25 per cent of it, if export revenues exceed 50 per
cent of total taxed income or 8 million euro in the given tax year. The same allowance
applies to investment projects, which purchase machinery for the exploitation of
patents and domestic research and development implementation projects or for the
equipment purchases for pharmaceutical companies in order to introduce the ISO
9000 system or to increase quality insurance. Similarly, projects with a recycled
materials content of at least 10 per cent are qualified for the same allowance. Third,
companies employing disabled persons may receive allowances which depend on the
number of such kind of persons employed. The law, describing the allowances,
determines the types of investment costs, which can be taken into account in the
above cases. These include the purchase of machinery and equipment, the purchase
of buildings or vehicles (excluding passenger cars), the purchase of companies from
the Treasury. From the beginning of 2000, only new investments, realised in the
special economic zones are entitled to receive tax allowances. Tax allowances are
published in the Tax Law. (Information from the website: www.paiz.pl.)
The Tax Law also contains the regulatory framework for depreciation. Higher than
average depreciation can be applied in the case of certain enterprises or machinery
and equipment. (E.g. companies operating in areas with high unemployment can
apply higher depreciation rates.) Its rate is 25 per cent of the generally valid
depreciation period. Those companies can apply accelerated depreciation, which do
not use the profit tax allowance and are operating in a special economic zone.
Depreciation seems to be the most important investment incentive in Poland after the
phasing out of the tax allowances.
Tax allowances are available for investors, who invest in areas with high
unemployment, they can deduct a certain percentage (50-75) of their investment costs
from their pre-tax income. In order to qualify for the allowance, they must increase
their employment with a predetermined rate. The list of towns and villages, for which
that allowance is available is published every year by the Council of Ministers.
Another fiscal incentive is the duty free import of contribution in kind for foreign
investors, with a requirement of not selling it in 3 years.
As a financial incentive, credits with preferential rates are available for investors, both
foreign and domestic. The preferential rates amount to 50 per cent or 75 per cent of
the actual market rate.
As for other incentives, 15 special economic zones operate in Poland under the
jurisdiction of the Minister for Economics. The Council of Ministers determines their
activities, the conditions for and duration of tax holidays and other incentives and
eligibility for these incentives. (Hirvensalo, 2000, p. 13) The regulatory framework for
27
the special zones was created in 1994. On the basis of the aim of their establishment,
the special economic zones can be grouped as follows: zones for the reduction of
structural unemployment; zones for the restructuring of the local industry; zones,
which contain foreign investments of strategic importance; zones, which are aimed at
exploiting certain special advantages of the given region; and zones containing
technological parks. The special economic zones offer certain incentives for the
investors, such as exemption from or reduction of the profit tax for a certain period of
time, areas, buildings etc. inside the special economic zone are exempt from central
and local taxes. Certain performance and other requirements must be fulfilled by the
investors, which want to operate in a special economic zone. (Novák, Wisniewski
(2000))
The special economic zones must be closed down with the entry of Poland into the
EU, however, Poland tries to negotiate a ten year derogation for the further operation
of the zones. Since the beginning of 2000, tax allowances are available only for
investments realised in these zones (other requirements, which were described above
are still valid), thus fiscal and other incentives are connected to each other in the
Polish case.
Besides the special economic zones, customs free zones also exist in Poland. Their
number at present is 7, and they are established close to traffic hubs. From their place
of establishment it is evident, that they are of commercial type. Their location is
determined centrally, and for their operation they need a permit from the council of
Ministers. They offer incentives (e.g. duty reductions) for promoting processing,
packaging etc. of imported inputs inside the zone. Their role in attracting FDI is
negligible.
Besides the published incentives, it is obvious from anecdotal evidence that large
investment projects which deemed to be strategic by the government, can negotiate
individual allowances and grants with the government.
PAIZ (Panstwowa Agencja Inwestycji Zagranicznych) is the Polish agency for
investment promotion.
Slovakia
Slovakia was left behind in the competition for FDI in the region. This can be the
reason for the introduction of a relatively generous scheme of fiscal incentives in May
2000. There is no separate law on foreign investment, tax allowances are published in
relevant laws on taxation.
As a fiscal incentive, the Slovakian government offers a ten-year tax holiday for foreign
companies investing at least 2.3 million euro. Before May 2000, investing companies
fulfilling the same requirement, could obtain a tax holiday for 5 years. Another
requirement, abolished in May 2000 was that the newly established production facility
had to manufacture goods, which were imported beforehand, and were not yet
manufactured in Slovakia before the has been established or that at least 60 per cent
of the production was intended for export. (Világgazdaság, 15 May 2000)
Investment projects, realised in regions with high unemployment, can receive the
same incentive with a minimum investment of 1.15 million euro. Moreover, for certain
service industries (e.g. hotels, passenger transport), it is sufficient to invest at least 1.5
28
million euro, irrespective of the concrete location of the company, in order to be eligible
for the tax allowance. Before May 2000, a further 20 per cent tax allowance was
available in connection with R+D activities and reinvestment.
The above incentives are available only for foreign companies and are closed for
domestic ones. The foreign investor must hold at least 75 per cent of the shares in the
newly established company and they must establish themselves before 31 December
2002 in order to benefit from the allowances. (OECD,2000, p. )
On top of that, as a newly introduced financial incentive, the government offers a
support of 40 to 160 thousand Slovakian koruna for every newly created job starting
from May 2000. (Világgazdasaág, 15 May 2000)
An accelerated depreciation is possible for certain companies, the rate of which is 20
per cent. The new law, which entered into force at the beginning of 2000, has reduced
the depreciation periods.
As for other fiscal incentives, import duties on high tech machinery and equipment of
the HS Sections 84 and 85 were abolished in 1999.
As a special financial incentive, which is less relevant from the point of view of foreign
investments, the Slovakian government operates a specific programme to promote the
establishment and development of small and medium sized enterprises. The
programme is open to any resident performing business activity and employing 250
employees or less, irrespective of the form of business activity and ownership. The
National Agency for SMEs Development, which is responsible for the programme was
established in 1993. The support takes the form of loan guarantees, subsidised
interest rates, preferential credits, refunding financial subsidy or grant.
In the group of other investment incentives, customs free zones exist in Slovakia, but
they are not of great importance from the point of view of attracting FDI.
SNAZIR is the Slovak Agency for Foreign Investment. It provides information for
potential investors.
Slovenia
Slovenia applies a very limited range of incentives for foreign investors. This is true
even historically, because with the exception of duty free imports of foreign investment
in kind (mostly of machinery equipment), which was abolished in 1994 and the special
treatment of foreign investors in free customs zones, Slovenia has never offered any
specific incentive for foreign investors. (Rojec, 1997, p.8.) Thus, up till 2000, fiscal and
financial incentives have been basically non-existent in Slovenia. This policy stance
seems to change recently with the implementation of the Programme of the
Government of the Republic of Slovenia for the Promotion of Foreign Direct
Investment in 2000.
As a new fiscal incentive connected to an other kind of incentive, a reduced corporate
tax rate of 10 per cent applies to companies operating in economic zones in Koper
and Maribor. Companies may also take advantage of the accelerated depreciation,
ranging from 5 per cent on building to 50 per cent on computers. The tax base may be
29
reduced by up to 40 per cent for investments in fixed assets (excluding passenger
cars). (Information from the website www.investslovenia.org.)
As for financial incentives, grants are available for foreign investors. Grants are
available to companies meeting a special criterion: their newly started project must
create at least 100 jobs in 2 years‟ time. For investment projects in less developed
parts of Slovenia or in R+D, the threshold is 20 new jobs. The amount of the grant is
assessed on a case by case basis. Projects including technology transfer and those
that will help balanced regional development are encouraged. (Information from the
website www.investslovenia.org.)
As for other incentives, investors in free customs zones are not liable for payment of
sales tax on imports to free zones and of customs duties, nor are they subjected to
other trade policy measures until goods are released into free circulation. However,
these zones attracted a negligible amount of foreign investment. (Rojec, 1997, p.9)
Municipalities offer other forms of incentives, such as easy access to industrial sites,
to fully developed infrastructure, reduced local taxes. These are also negotiated on a
case by case basis. Local employment offices offer free training or retraining for
companies hiring previously unemployed persons.
The Trade and Investment Promotion Office started to play a more active FDI
promoting role only in 1999. It has departed in implementing certain promotion
activities, such as increasing accessibility of industrial land, introducing employment
incentives, which are accessible for foreign investors, increasing the amount of free-
of-charge services for foreign investors offered by the office, and programmes aimed
at improving the image of Slovenia as a location for FDI. (Rojec, 2000, p.6)
Dissatisfied with the inflow of FDI, which reached record low levels in 1998 and 1999
(Slovenia, 1999, p. 50) a project entitled Programme of the Government of the
Republic of Slovenia for the Promotion of Foreign Direct Investment in 2000 is aimed
at inter alia introducing a more active FDI promoting government policy, in accordance
with results of the Joint assessment of medium-term economic policy priorities of
Slovenia (European Economy, 1998, p. 12). The most important elements of the
programme are the following. First, the accessibility of building sites for conducting
business activities and financial incentives for greenfield investors. The planned FDI
incentives are about to match similar schemes in the most important competitive
countries for FDI. The incentives are about to promote mainly new (greenfield)
investments and to increase existing capacities of companies with foreign participation
already operating in Slovenia. As part of the programme, the Trade and Investment
Promotion Office will be institutionally restructured. Another important element of the
programme is to allow a more active participation of foreign investors in the
privatisation projects of Slovenia. (Rojec, 2000, p. 6-7)
30
31
Annex Table
Czech Republic Estonia Hungary Poland Slovakia Slovenia
Population 10.25 million 1.45 million 10.1 million 38.68 million 5.41 million 1.98 million
GDP 59.4 billion USD EUR 5.34 billion 58.3 billion USD 188.0 billion USD 25.5 billion USD 20.01 billion USD
GDP/capita 5790 USD EUR 3685 5830 USD 4860 USD 4660 USD 10,958 USD
Profit tax 31 % There is no profit 18 % 30 % 29 % 25 %
tax in Estonia. The
corporate income tax
is 26%, but there is
no corporate income
tax on retained
earnings
Tax on dividends 15% unless 26/74 of the 36 % ? ? When dividends
double taxation amount of taxable are paid abroad: 15%
prevention treaty payment withholding tax,
says otherwise except when there is
double taxation
agreement (most
cases 5%), when
paid to residents:
25%
Interest rate 5,31 % 7.78 % (Dec 11,06 % 18,55 % ? 1999: T* + 5.7%
(short term) 2000) T* - base interest
rate (calculated as
three month average
inflation rate)
Eligibility for Domestic and Domestic and Domestically Domestically Domestic Domestic and
incentives foreign legal persons, foreign investors registered legal registered legal economic agents, or foreign legal persons
domestic physical persons, or economic persons or economic domestic legal
persons societies, co- societies persons with foreign
operatives, ownership, tax
entrepreneurs holidays available
only for foreign
investors (75 per cent
ownership)
32
Minimum yes, 350 million NO 10 billion HUF (or 2 million euro 2.3 million euro no
investment KC (or 175 million KC 3 billion HUF in less (or 1.15 million euro
requirement in less developed developed regions) in less developed
regions) regions or in certain
sectors)
Fiscal incentives Fiscal inc
Exemption on yes (?), and on Estonia has (abolished in duty free import yes (?), and on abolished in 1995
VAT/import duties imported parts and virtually no export- 1993) of contribution in kind imported parts and
and fees on imported components(?) import duties. for foreign investors, components (?)
capital Customs duty is with a requirement of
composed only on not selling it in 3
imported foodstuff years
from the countries
Estonia does not
have the free trade
agreement. Estonia
has free trade
agreements with 28
countries, incl EU
countries
Exemption from HS 84 and 85 Estonia has import duties on Exemption from
import duties/VAT on sections, they must virtually no export- high tech machinery VAT: equipment used
certain goods be of higher value import duties. and equipment of the by its owner for
than 10 million Customs duty is HS Sections 84 and business purposes,
koruna, can not be composed only on 85 were abolished in which business the
older than 1 year, can imported foodstuff 1999 owner is moving to
not be sold or rented from the countries ?exemptions from Slovenia ,
for 4 year – since the Estonia does not VAT on services insurance and
date of release to have the free trade related to export? reinsurance services,
free circulation agreement. Estonia trading in shares
has free trade
agreements with 28
countries, incl EU
countries
Corporate tax relief on There are no Investments in for companies a ten-year tax reduced
holidays corporate tax for 10 corporate income tax production facilities fulfilling certain holiday for foreign corporate tax rate (10
years (for newly holidays. There is no and hotels with an criteria companies investing %) for companies
established corporate income tax amount exceeding 1 at least 2.3 million operating in
companies, legal on retained earnings billion HUF may euro, or 1.15 million economic zones (in
33
entities and natural receive a 50 per cent euro in less Koper and Maribor)
persons), or partial tax allowance for 5 developed areas or in
discount of corporate years (100 per cent certain sectors
tax for 5 years for investments in (before May 2000,
(already existing legal priority regions (with less generous+
entities or natural high unemployment export performance
persons) for investors rates) or in requirement)
meeting special entrepreneurial ? details of
criteria zones, creating more performance
than 100 jobs or 100 requirement?
per cent for ten years
for investments with
an amount of more
than 10 billion HUF
and creating at least
500 jobs in the
second year of
operation), provided
that the increase in
sale revenues
exceeds a set
minimum level; same
for infrastructure
projects in areas with
high unemployment
Accelerated Yes - 25 per cent NO 2 to 6 per cent for Higher than 20 per cent, yes, ranging from
depreciation for machinery and 4 buildings, 33 per cent average depreciation reduced depreciation 5 per cent on
per cent for buildings for machinery can be applied in the period from 2000 buildings to 50 per
(technical), 20 per case of certain cent on computers
cent for vehicles and enterprises or
14 per cent for other machinery and
machinery equipment. Its rate is
25 per cent of the
generally valid
depreciation period.
Investment/reinve There are no ? yes? before May 2000: no
stment allowance restrictions for tax holidays for
investment / reinvestment, now?
reinvestment
34
Special 10% of the cost of There is no a 20 per cent for companies before May 2000, Taxable base
deductions from the new machinery corporate income tax deduction from the fulfilling certain tax holiday for R+D may be reduced up to
tax base on retained earnings tax base of the direct criteria expenditures 40 per cent for
R&D costs may costs linked to R+D ?deduction of investments in fixed
be deducted from the activities advertisement costs? assets
tax base
Possibility to yes – 7 years YES- ? years yes – 5 years? yes (details?) yes (details?) yes (up to 5 year)
carry forward losses
Other fiscal no NO no no no no
incentives
Financial incentives Financial
Preferential Yes, for small and NO yes, targeted preferential rates ? no
credits medium-sized allocations amount to 50 per
companies only cent or 75 per cent of
the actual market
rate.
Non-repayable Yes, targeted Export promotion yes, targeted ? the government For investment
grants allocation grants: allocations offers a support of 40 projects that create at
job-creation grants www.export.ee to 160 thousand least 100 jobs in 2
training grants Grants for the Slovakian koruna for years‟ time, (for
investment grants in innovative projects: every newly created investment projects in
regions with very high www.etag.ee job less developed parts
unemployment of Slovenia or in
R+D, the threshold is
reduced), the amount
of the grant is
assessed on a case
by case basis in 2000
it amounted EUR
2500 – 7500 EUR per
job created.
State guarantee For small and NO ? ? ? Possibel by
for investment loans medium-sized government or
companies only parliament approval
Export Yes (EGAP) YES, yes, state-owned yes? yes? yes (Slovene
guarantees, governmental export EXIMBANK and Export Corporation)
insurance, credits guarantee for up to MEHIB
EUR 19 million
www.ekgs.ee
35
Environmental Yes, targeted NO yes, targeted ? yes (Ministry of
protection grants allocation allocation environment and
spatial planning,
Ecological Fund)
R+D grants Yes YES, grants for yes, OMFB/OM ? Yes
R&D both for
companies and for
scientific institutions
www.estag,ee
Job creation yes, the amount NO yes, Labour ? yes
grants depending on the Market Fund
region‟s
unemployment
Job training yes, up to 35 per When training yes, Labour yes, Ministry for
grants cent of training costs unemployed people, Market Fund labour and social
government is affairs
covering a part of the
training costs.
Training grants are
calculated on case by
case basis
www.tta.ee
Grants for Available to NO no
construction of municipalities only,
infrastructure not companies
Other financial Job-creation YES, interest no
incentives grants for the support and
employment of fresh guarantee support for
school leavers and the loans for
graduates, the companies in the
unemployed and rural areas
handicapped
Other incentives Other incentives
Preferential no NO ? no
government contracts
Provision of low- yes, from the NO (yes, yes,
36
priced real estate National Land Fund, municipalities) municipalities and
to municipalities or agencies may offer
directly to investors, developed industrial
low cost building and sites at a reasonable
infrastructure as well price
Special yes, investment YES, Estonian yes, investment yes, investment yes, investment yes, investment
institutional support agency Investment Agency agency agency agency agency
www.investinesto
nia.com
Programmes to Yes, see YES, export available only for yes? government yes, Ministry of
support small and www.cmzrb.cz promotion grants Hungarian support, which takes economy
medium sized www.export.ee entrepreneurs the form of loan
enterprises Advisory services (exception from guarantees,
for free www.erda.ee national treatment) subsidised interest
rates, preferential
credits, refunding
financial subsidy or
grant
Simplified Yes YES, when Yes (in
export/import operating in the free accordance with EU
procedures zone procedures)
Free economic Free trade zones YES, Muuga port, yes, industrial 7 customs free customs free Companies
zones of commercial type: free trade zones, no zones, of commercial zones exist operating there are
easier customs duty on contribution type (operational?, free of payment of
formalities, tax relief in kind, no sales tax details?) VAT and customs
from customs duties, and duties on duties (Port of Koper,
VAT and excise imported inputs if it is Maribor airport)
duties exported later
Special economic None – the Czech NO ? (off shore?) yes, 15; types: ? No
zones incentives scheme is zones for the
available everywhere reduction of structural
on the territory of the unemployment;
Czech Republic zones for the
restructuring of the
local industry; zones,
which contain foreign
investments of
strategic importance;
37
zones, which are
aimed at exploiting
certain special
advantages of the
given region; and
zones containing
technological parks;
incentives: exemption
from or reduction of
the profit tax for a
certain period of time,
areas, buildings etc.
inside the special
economic zone are
exempt from central
and local taxes;
performance
requirements must be
fulfilled
Industrial parks Over 60 parks Under yes, with no
(municipalities construction government support
receive government
support)
Other
Municipalities various incentives Incentives in various incentives ? (centrally ? yes, e.g. reduced
(usually infrastructure acquiring industrial (industrial site, organised?) local tax, industrial
support, cheap land, land or industrial reduced local taxes, site, infrastructure
industrial parks, etc.) property, handled in industrial parks etc.)
case by case basis
The presumed to offer similar Very investor- to encourage the to concentrate to encourage the to encourage the
intention of the incentives compared friendly and very pro- inflow of FDI, incentives into the inflow of FDI, to catch inflow of FDI, and to
government to the main enterpreneur chanelling: to sectors economic zones up with the main use it especially to
competitors, government. No (with higher value (regions), accelerated competitors; reduce
only sectors with intervention, FDI is added) and regions depreciation as an industrial policy tool : unemployment, to
higher value added attracted by the (with high important incentive, for the development promote greenfield
are supported liberal economic unemployment), large large projects of areas with high investments, and to
policy, low level of projects receive supported, unemployment and enhance the
regulation and support for certain (service) participation of
favourable tax sectors (previously: foreign capital in
38
system export) privatisation projects
Practical Incentives have Incentives are not incentives are positive signals to
experiences with the encouraged investors used as a tool to more important for investment
incentives to locate investment attract FDI into footloose export- community
project in regions with Estonia. Estonian oriented investors,
high unemployment investment climate as other policies are
a whole can be aimed at keeping
considered as an them in Hungary
incentive to the (special case:
foreign investors industrial free trade
zones), other
investors do not
consider incentives to
be important
The eligibility criteria at present are the following. Investment in high tech manufacturing sectors listed in the act or investment in other manufacturing sectors
provided that at least 50 per cent of the cost of the production line consists of machinery listed on the government approved list of high tech machinery can benefit
from the incentives, as well as investment in the acquisition or construction of a new production plant or in the expansion or modernisation of existing production
facilities to launch a new production activity. Sectors, in which the tax allowance is not available: metallurgy, electric energy, gas, water, construction, after-sale
services for passenger cars, retail and wholesale trade and other services. The value of the investment must be at least .CZK 350 million (approximately USD 10
million), and in regions with high unemployment, the minimum investment requirement is reduced to CZK 175 million (approximately USD 5 million). Investors
equity must account for at least CZK 145 million (approximately USD 4 million). Investment in machinery must account for at least 40 per cent of the total
investment. The proposed production must meet all the Czech environmental standards.
First, tax allowances are available for investors, investing at least 2 million euro. They can deduct the invested amount from their pre-tax income, but the
deduction must not exceed 10 per cent of the total tax base. Second, the costs of the investment can be deduced from the tax base up to 25 per cent of it, if export
revenues exceed 50 per cent of total taxed income or 8 million euro in the given tax year. The same allowance applies to investment projects, which purchase
machinery for the exploitation of patents and domestic research and development implementation projects or for the equipment purchases for pharmaceutical
companies in order to introduce the ISO 9000 system or to increase quality insurance. Similarly, projects with a recycled materials content of at least 10 per cent
are qualified for the same allowance. Third, companies employing disabled persons may receive allowances which depend on the number of such kind of persons
39
employed. The law, describing the allowances, determines the types of investment costs, which can be taken into account in the above cases. These include the
purchase of machinery and equipment, the purchase of buildings or vehicles (excluding passenger cars), the purchase of companies from the Treasury. Tax
allowances are available for investors, who invest in areas with high unemployment, they can deduct a certain percentage (50-75) of their investment costs from
their pre-tax income. In order to qualify for the allowance, they must increase their employment with a predetermined rate. The list of towns and villages, for which
that allowance is available is published every year by the Council of Ministers.
40
