Discussion about the most attractive emerging markets for business often relies on government incentive programs offered to foreign investors. Outperforming emerging markets typically have governments that are outperforming in terms of offering government incentive programs to attract capital.
The so-called BRIC countries – Brazil, Russia, India, China (and possibly South Africa) – are less interesting to foreign direct investment (FDI) these days. Growth rates in three of these countries are less than the current U.S. growth rate. In particular, Russia’s growth rate seems to have stalled after the invasion of Ukraine. Perhaps Brazil’s economy is overly fixed to oil price.
Mexico, Colombia, Kenya, Malaysia, India, Indonesia, and Poland currently offer bottom line reasons to do business there. Therefore, in this article, we discuss some of the noteworthy government incentive programs for foreign investors now.
What Are Government Incentive Programs?
A government incentive program is a formalized scheme to promote specific investment actions and behaviors by certain investors over a specific period of time. Government incentive programs help national governments to attract long-term capital to the country.
Emerging markets governments often promote their government incentive programs to specific audiences. For instance, if the government wants to attract foreign investors in aerospace, consumer goods, electronics, and automotive inbound manufacturers or investors like Mexico, it engages businesses and investors with investments in these areas.
Preparing a specific incentive package almost always considers the objectives of the foreign investor. Elements of the incentive package may include:
- Tax incentives.
- Training programs to upgrade workers’ skill levels.
- Capital equipment grants.
- Subsidized real estate may be part of the specific incentive program proposal.
The goal of most government incentive programs to foreign investors includes developing larger economies in certain industries, providing more jobs to residents and also increasing the investor’s long-term commitment to the country. In the next section, we’ll review the most relevant emerging markets government incentive programs for foreign investors.
7 Most Important Emerging Markets Government Incentive Programs
Many emerging markets government incentive programs reach out to specific businesses and investors. In some cases, a natural potential fit exists.
Let’s say a multinational corporation already has a presence in Mexico. Mexican state and federal governments engage corporate representatives in a discussion about how to increase the company’s workforce and commitment to the country. After both parties consider a deeper and mutually beneficial relationship, a confidential proposal is prepared by the government to the corporate entity. If the corporation doesn’t accept the proposal, the government reserves the right to withdraw it.
Mexico continues its intention to “entice foreign manufacturers to make relocation decisions” in 2017. Since President Peña Nieto was elected in 2012, Mexico has made decisions to reform and change its energy and telecom industries, labor markets, educational system, and fiscal frameworks. Mexico is eager to cultivate new foreign direct investment.
The Mexican government says that several incentive packages are in the final stages, but each is different. The incentive programs differ by location, level of investment, sector focus, types and numbers of jobs created, and strategic benefits to Mexico’s long-term national goals. Mexico wants investors to commit substantial resources that will create high-quality jobs. For investor partners, the Mexican government “wants to help you make that happen.”
Colombia is also actively open for FDI. President Juan Manuel Santos says the country offers income tax deductions and exemptions in priority business sectors such as rural development and security. Tax exemptions range from 10 to 30 years. Tax incentives to foreign investors include preferential import tariffs, credit, or additional risk capital. In particular, the Colombian government wants to create new production and employment in parts of the country affected by recent natural disasters.
Kenya seeks new FDI partnerships. President Uhuru Kenyatta states that the government wants to develop national infrastructure and the power and energy sectors.
According to the government website, “foreign investors (…) generally receive the same treatment as local investors (…) multinational companies make up a large percentage of the industrial sector.” The government claims there is “little discrimination against foreigners” concerning investment, equity, or access to government-funded research. Export programs don’t distinguish between local or foreign-owned products.
Kenya prefers its business partners to employ local workers. In order to qualify for the Government of Kenya investment incentives, the foreign business must submit an investment certificate of at least $100,000. Foreign businesses and investors can’t own property in Kenya but the government allows investors to lease land for up to 99 years.
Malaysia’s government announced it will offer additional tax incentives to foreign investors. The country wants to modernize and expand its healthcare, infrastructure, manufacturing, education, and financial sectors.
Investors are offered partial and even total relief from paying income tax for a specific period of time with direct tax incentives. In addition, indirect tax incentives come in the form of exemptions from sales tax, import and excise duties.
Indonesia invites foreign investors to participate in infrastructure and oil and gas sector development. The country announced it will improve the education system to improve workforce productivity over the next decade. Furthermore, Indonesia’s growing middle class has financial wherewithal to buy new goods and services.
India’s decision to maintain lower taxes on income and investments hopes to retain foreign investors’ commitment to the country. India’s government decided to defer its General Anti-Avoidance Rule on taxes until 2018. The Indian government recognizes the importance of foreign capital. Both state and central governments’ relaxation of environmental standards and new monetary and tax incentives for investment is geared towards improving India’s manufacturing, hydrocarbon, financial, defense, and railway sectors.
Poland is Europe’s only emerging market with noteworthy government incentive programs for foreign investors. The government wants foreign investors to participate in the development of its energy, defense, and national infrastructure initiatives.
Government incentive programs attract significant capital to emerging market economies. Especially relevant are Mexico’s long-standing government incentive programs; they demonstrate the importance of offering meaningful incentive packages to prospective investors.
Almost all government incentive programs reduce or remove the impact of federal, state, and local income tax on corporate earnings. As a result, incentives by industry assist the government in attracting same-vision foreign investors. Furthermore, land grants or favorable lease terms are frequently part of an enticing government incentive program that creates new jobs and quality-of-life for all involved.
Would you consider taking advantage of the benefits offered by so many governments around the world?