Locational considerations in attracting multinational corporate regional headquarters: the relevance and role of tax law and tax incentives

The last decade has witnessed an intensification in the global competition for foreign investment. In particular, both developed and developing nations alike have sought to attract investment by multinational companies in high level service operations. Increasingly these nations have turned to tax policy with a view to enhancing their attractiveness as a destination. The competition to attract Southeast Asian regional headquarters of multinational corporations is a case in point. This competition has been stimulated by the perception that the market leader, Hong Kong, is losing its lustre. This was certainly the dominant view leading up to 1997. In an effort to improve their competitive position many Southeast Asian nations have enacted tax concessions targeted at regional headquarters. Undoubtedly Singapore has been the most proactive nation in this regard although Malaysia, the Philippines, China, Thailand, Taiwan and Australia have also enacted regional headquarters tax incentives to some degree. Whilst Singapore's success in attracting regional headquarters may appear a compelling case for these incentives there is evidence to suggest that other factors dominate the locational decision namely: • geographical location and proximity to markets, • political stability, • quality of infrastructure, • availability of skilled labour, and • pre-existing operations. Tax would appear to be simply viewed as a cost by multinationals and, although relevant, is not decisive except possibly at the margin. That is, all else being equal then the tax regime of a country may be determinative in a negative sense. Most significantly, however, research has identified that tax concessions cannot compensate for critical deficiencies in the other determinants. These conclusions should be of particular interest to policymakers in developing Asian nations considering introducing or extending tax incentives to attract foreign direct investment. Of course the analysis is restricted to the influence of tax incentives on one particular type of foreign investment. Nevertheless the findings underscore the need for careful consideration of the costs and benefits of such measures before implementing them. This is not to deny fiscal policy any role in encouraging investment in a developing nation. However in lieu of legislative tax incentives or negotiating special confidential deals a moderate tax regime that is both clear and non-discriminatory in its application may best serve to foster a positive environment for both domestic and foreign investment