Improving Fiscal Incentives

established or have been upgraded from provincial-level industrial parks. They are often located in cities without nationally renowned universities and research institutes, whereas the first science parks are located in big cities such as Beijing, Shanghai, and Nanjing.

Improving Fiscal Incentives

Fiscal incentives conceptually seek to close the gap between the private rate of return to potential investors and the social rate of return. They aim to offset the costs associated with transport and logistics, weaker infrastructure, higher factor prices, lower levels of public services and amenities, and weaker business climates. They may also be used as a coordinating mechanism, for instance, to motivate a first mover—an anchor firm to locate and catalyze a local cluster. A successful cluster will generate spillovers between firms, increasing agglomeration and productivity growth. These spillovers can work horizontally, with a large number of firms in the same sector building up thick labor markets and other agglomeration economies, as well as vertically, with co-location of input suppliers and the development of forward and backward linkages.

Fiscal Incentives to Attract Foreign Direct Investment and Global Value Chains

Attracting a value chain is a way of reducing the dimensionality of policy, as noted in chapter 7. For instance, the Israeli intervention in the Guajira region of Colombia in part reduces both the information and entrepreneurial quality issue, allowing the government to focus on other elements of the enabling environment that are critical for these firms (see box 5.3 in chapter 5). In the Mekong Delta in Vietnam, the rice value chain anchored by the An Giang Plant Protection Company reduces the risk and information barriers in new fertilizers and seeds and the final market, and provides financing, leading to rapid growth in farmer incomes. As stressed in Harvesting Prosperity (Fuglie et al. 2019), for rural areas, value chains—both local and global—can provide coordinating anchors and offer an important tool for reducing policy dimensionality. By virtue of being more advanced firms, they can remove some constraints, such as entrepreneurial ability, financing, or marketing. Hence, more focus can be placed on other needed elements, such as providing infrastructure and upgrading worker skills.

A critical attractor of value chains is the local contracting environment. As panel d in figure 8.3 shows, it can vary in credibility substantially across regions within countries. No firm wants to provide these services and then have suppliers sell their outputs to someone else at a higher price. Hence, the security of the contract over delivery and prices is fundamental.

But fiscal incentives of various types are also a tool to attract GVCs. There are some successes. Box 8.4 describes how the Hawassa Industrial Park in Ethiopia, working closely with the world’s second-largest apparel company, Philips-Van Heusen, has