By TIOL News Service

NEW DELHI , NOV 16, 2013: A working paper issued by Asian Development Bank (ADB) has called for a new investment facilitation strategy by local Chinese governments in place of the existing one that relies on tax incentives competition.

The paper captioned 'FDI Technology Spillovers and Spatial Diffusion in the People's Republic of China' has been prepared under ADB Working Paper Series on Regional Economic Integration.

The paper points out that PRC's government has been providing incentive packages to multinational corporations (MNCs) since the early 1990s to attract FDI.

Corresponding strategies provided by both central and local governments include tax holidays or reductions, job creation subsidies, preferential loans for FDI, and construction of industrial facilities (with subsidized land and infrastructure).

It says that many local governments compete with their neighbors in this regard, which can result in severe strategic tax competition and a "race-to-the-top" or "race-to-the-bottom" problem.

The Paper has concluded that domestic firms mainly benefit from FDI presence in their neighboring regions, while intra-regional FDI impacts are mainly negative."

It says: "consequently, as a particular local government is concerned, it is important to re-think the strategic tax competition approach for attracting FDI as the benefits from doing so may not be as large as commonly believed."

It has thus suggested that "a better strategy for local governments would be to cooperate with each other to provide a better environment for both MNCs and domestic firms, such as providing better infrastructure for transportation across regions, lower regional tariffs for capital and labor, and fair tax treatment for both MNCs and domestic firms."

It affirms: "To this end, coordination between local governments is of the utmost importance."