Governments around the world have widely deployed tax and non-tax incentives to attract investors in specific sectors and locations and support national development objectives (OECD, 2022[1]). OECD countries are no exception: according to the survey results, all 35 national OECD IPAs report that their governments employ at least one investment incentive to attract or retain foreign investment, with tax incentives being used by 97% of countries. OECD countries use a combination of tax and non-tax incentives. Corporate income tax (CIT) incentives are reported to be significantly more prevalent than other tax incentives, with 86% of OECD countries offering them. Non-tax incentives are dominated by financial incentives, such as grant, subsidies and loans, which are also offered in 86% of OECD jurisdictions. Regulatory incentives are less common, available about half of jurisdictions, while in-kind benefits are provided in just below a third of countries.

The rationale for offering incentives is to attract investments that might not otherwise occur as well as aligning these efforts with governments’ objectives like capital attraction, job creation, productivity enhancement, and sustainable development. By bridging the gap between private profitability and public interest, incentives serve targeted policy goals beyond merely promoting and facilitating investment. For instance, three-quarters of OECD countries consider that enhancing productivity and innovation is a top objective of their incentive regime, while promoting regional development and job creation are top objectives behind incentives in approximately half of OECD countries and addressing climate change in just below a third. Other sustainable development goals, such as gender equality, social inclusion, and export promotion, are less important objectives behind investment incentives, according to respondents.

The regulatory frameworks governing these incentives are complex and fragmented, often involving multiple overlapping legal structures. Most countries (86%) primarily rely on tax laws to govern tax incentives, which are nonetheless frequently also governed by other legal instruments. Non-tax incentives are often regulated by multiple competing frameworks, with 54% of OECD countries using supranational legislation, just below half relying on investment laws, and about a third on subnational or sector-specific laws. This lack of consolidation can create challenges for public governance, scrutiny, and transparency regarding the costs and benefits of incentives. For investors, navigating these scattered and intricate frameworks can be time-consuming and may limit access to the full range of incentive schemes.

The design of incentives is often shaped by external factors, creating pressure to sustain their use. For example, 80% of IPAs report that international competition influences incentive design, suggesting that the eligibility criteria of incentives and their benefits may be offered to match those of other countries. Additionally, public consultations are integral to incentive design, with 91% of OECD countries incorporating insights primarily from private sector actors, while engagement with academia and civil society is less common.

When it comes to eligibility for incentives, investment size conditions – such as minimum amounts invested or jobs created – are used by 83% of countries. However, three-quarters of OECD jurisdictions do not differentiate between foreign and domestic investors, or between large and small firms, in their incentive policies. Most OECD countries also allow state-owned enterprises to apply for investment incentives, ensuring broad access across various types of firms.

Similarly, sectoral and regional targeting are central strategies in OECD incentive design, with 77% of countries focusing on specific industries and 91% on particular locations. While climate change and the digital transition are not reported as the most pressing policy objectives behind incentives, the sectors targeted by incentives still focus highly on these areas. Priority sectors include those aligned with the climate and digital transitions, such as renewable energy (66%), battery production (57%), and semiconductors (51%). Location-based incentives are also widespread, with two-thirds of OECD countries specifically targeting remote or less developed regions to bolster regional development objectives.

Despite their wide use across OECD member countries, IPAs generally do not consider incentives, especially tax incentives, as critical factors in influencing investor location decisions. CIT incentives score a relevance rating of 5.3/10, and other tax incentives 4.7/10, while non-tax incentives are seen as somewhat more important (6.5/10). This is not uniformly the case across OECD countries, however, as IPAs in smaller economies consider incentives more influential. Broadly, OECD IPAs see incentives as just one of many factors in attracting investment. Infrastructure quality, workforce skills, and a supportive legal environment are considered more crucial, regardless of the type of incentives – tax or non-tax – or the type of investment – natural resource-seeking, export-oriented, or market-seeking. IPAs thus take a multifaceted approach to attract FDI, with incentives being just one component of their broader offering to investors. In contrast, activities related to image-building, investment facilitation, and investment generation are regarded as more important than promoting and offering investment incentives.

OECD IPAs report incentives to be aligned with their strategic objectives in 83% of cases and with their priority sectors in 71% of them. Nonetheless, IPAs typically do not participate in incentive design, which is handled by ministries or other agencies. Tax incentives fall under the jurisdiction of tax authorities and finance ministries, while non-tax incentives often have multiple governing authorities. While IPAs can play various roles in managing both tax and non-tax incentives, they are active in overseeing non-tax incentives in 38% of cases compared to just 23% for tax incentives.

OECD countries use various institutional arrangements to manage investment incentive applications, affecting the number of entities investors must interact with. While IPAs play a leading or secondary role in the governance of incentives in 70% of cases, other institutions are often involved as well. Two-thirds of IPAs report that ministries, such as those for economic affairs, industry, trade, or specific sectors, are the main counterparts for investors, while finance ministries lead in fewer than 10% of cases. Investors must interact with multiple entities at national and subnational levels, risking adding complexity and time to the process. A centralised system, with a single point of contact, could simplify the application process for investors.

In decentralised countries, subnational authorities typically have a greater role in the governance of investment incentives. Subnational incentives are available in 83% of OECD jurisdictions and can be offered either in co-ordination with, or independently of, national incentives. In federal or more decentralised countries, subnational authorities typically assume more roles, such as evaluating applications, awarding incentives, overseeing compliance, and developing policies. Whereas in unitary or more centralised countries, subnational authorities have a more limited involvement in these activities.

Although IPAs work with both national and subnational bodies, much of this collaboration is informal, which can limit the effectiveness of incentive implementation. Since investment is a horizontal policy affecting multiple institutions, effective co-ordination mechanisms are needed to align policy goals and ensure that investment incentives are implemented effectively. Formalising these co-ordination efforts could enhance the efficiency of incentives and improve alignment across different levels of government.

Monitoring and evaluation (M&E) of investment incentives are also areas where IPAs have a limited role. While other government agencies participate in nearly 90% of M&E activities, IPAs engage in these processes only about half the time. Their main role often involves collecting investor feedback (57%), which complements the broader government assessment on the use and effectiveness of incentives.