ost governments institute towards MNCs. Most governments adopt policies aimed at both encouraging and discouraging inward FDI. They offer incentives (such as financial and tax incentives as well as market preferences) and they place restrictions on MNC activity. These policies can dramatically distort economic activity and reduce the efficiency of international investment. There is quite a large number of incentives that a government can offer to multinational investors. Fiscal incentives include tax reductions, accelerated depreciation, investment and reinvestment allowances, and exemptions from import and export duties. Financial incentives include subsidies, grants and loan guarantees. Market preferences include monopoly rights, protection from import competition and preferential government contracts. Governments also offer low-cost infrastructure (electricity for example). The gains to the country offering these policies are usually at the expense of another potential host country. Furthermore, a 1985 World Bank study found that “…an increase in one country's investment incentives tended to lead to increases in other countries' incentives”(2). Because investment incentives usually benefit companies that would have made their investment anyway, the result is wasteful competitive bidding among nations. This leads to a dilemma, where every country would be better off if each country reduced its incentives by the same amount. This is only possible through multilateral policy co-ordination, which could lead to huge welfare gains for all host countries.Many developing economies have attempted to restrict foreign direct investment because of nationalist sentiment and concerns about foreign economic and political influence The other side of all of this are the restrictions which are caused by the institution of policies. Host countries can restrict multinational companies' activities in a numbe...
