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

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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.

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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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Authors and Affiliations

  1. Ifo Institute for Economic Research and CESifo, Poschinger Str. 5, 81679, Munich, Germany

    Chang Woon Nam

  2. Ifo Institute for Economic Research, Poschinger Str. 5, 81679, Munich, Germany

    Doina Maria Radulescu

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  1. Chang Woon Nam
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  2. Doina Maria Radulescu
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Correspondence to Chang Woon Nam.

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Nam, C.W., Radulescu, D.M. Do Corporate Tax Concessions Really Matter for the Success of Free Economic Zones?. Econ Change 37, 99–123 (2004). https://doi.org/10.1007/s10644-004-6831-6

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