Foreign Direct Investment and Tax Incentives in the Extractives Sector: The Good, the Bad, and the Ugly

Developing countries throughout the world have often sought foreign direct investment due to the obvious benefits that emanate from the inflows of foreign direct investment to their economies. This has led to the introduction of several stimulant factors such as tax incentives. These certainly have contributed significantly to the attraction of foreign direct investment into Third World countries. The sectorial distribution of foreign direct investment into third world countries tends to skew towards the extractive sectors like the mining and drilling industries over the years as the other sectors may not be lucrative enough for foreign investors. Notwithstanding the benefits these economies receive from foreign direct investment in the form of enhanced capital, technology transfer, improved managerial skills, general economic growth, etc., the same economies have experienced some retarding factors from foreign direct investment. Some of such negative consequences of foreign direct investment are crowding out of local businesses, increase in environmental hazards, and distortion of local currency stability due to mass repatriation of profits by foreign investors. Using a review approach, this book chapter focuses on unearthing both the brighter and darker sides of foreign direct investment inflows to developing countries. With stylized facts from developing countries, the study further justifies in detail the pros and cons of tax incentives in the extractive industry through foreign direct investment.