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Economics of Planning

, Volume 37, Issue 2, pp 99–123 | Cite as

Do Corporate Tax Concessions Really Matter for the Success of Free Economic Zones?

  • Chang Woon Nam
  • Doina Maria Radulescu
Article
  • 191 Downloads

Abstract

Not only a large number of developing countries but also transition economies have established free economic zones (FEZs) with the aim of attracting foreign capital by providing tax incentives, creating employment opportunities, and promoting exports and regional development. Tax investment promotion schemes include profit tax exemption, free or accelerated depreciation, investment tax allowance, subsidy for investment costs, etc., the effects of which on firms’ investment decisions can be compared based on the net present value model. This study suggests that even a low corporate tax rate combined with generous depreciation rules does not provide incentives for investors when the inflation rate is high. A case study on Najin–Sonbong FEZ in North Korea delivers a wide range of more crucial economic and political reasons why such a development project can fail, although tax concessions offered there are more favourable than those in China and other Asian nations.

Keywords

free economic zone investment decision net present value tax concessions 

Abbreviations

EMTR

Effective marginal tax rate

FDI

Foreign direct investment

FEZ

Free economic zone

NPV

Net present value

PV

Present value

SEZ

Special economic zone

TED

True economic depreciation

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Copyright information

© Springer 2005

Authors and Affiliations

  1. 1.Ifo Institute for Economic Research and CESifoMunichGermany
  2. 2.Ifo Institute for Economic ResearchMunichGermany

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