What Are Investment Incentives?

K.C. Bruning

Investment incentives are government schemes such as tax credits and subsidies that are meant to encourage investment in targeted geographical areas. They are specifically meant to encourage entry level investments, in opposition to supporting the ongoing operations of a company that is already established in a location. A common use of investment incentives is to encourage a company to put its resources into a certain economy by opening plants, offices, or other similar operations.

Man climbing a rope
Man climbing a rope

One of the primary goals of investment incentives is to improve the economy in an impoverished or otherwise backward area. Attracting a big business, such as an automobile plant, can significantly improve the quality of life in a region. It can also provide the foundation for several more generations of prosperity.

Investment incentives may also be used to bring new innovations to less-developed areas. This can create jobs and help to encourage the growth of community. For example, there can be one large company which receives incentives and thus creates more industry by its presence. Where there was once no industry, an entire population can orient itself towards a new way of life, including acquiring different skill sets.

The most common indirect investment incentive is the tax credit. This benefit can be targeted at specific or general industries which locate in a certain area, depending on the need. It can also be used as an income tax credit for investors who support a particular kind of business.

A government may also give direct investment incentives such as subsidies, which are also know as investment grants. These funds are meant to encourage the development of industry in specific areas. It is often used to lift a region out of economic depression.

Some groups have reservations about the wisdom of using investment incentives. One concern is that the sudden boost in industry in a particular area harms the environment. Others feel that the lack of extensive regulation of investment incentives in many governments could result in decisions that do more harm than good to local and world economy.

There have also been concerns that investment incentives could disproportionately boost production in the wealthiest nations, as these countries have the most funds to distribute. Some feel that global regulation of these incentives is the only way to spread wealth so that it benefits those who are most in need. Other groups believe that each nation should be free to make its own decisions about incentives.

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