Behavioral approaches to optimal FDI incentives

Countries attempt to attract foreign investors by offering them a set of incentives. The most common types of foreign direct investment incentives are grants and tax relief. Although the amount of the grant is independent of future situations, the value of a tax relief depends on future profits. Our study used the behavioral approach to test experimentally the preferences of managers regarding the desired types of incentives under various conditions. We found, 'Regret Effect', 'Statues Quo Bias', and 'Insurance Effect' in subjects' decision making. A country can improve the incentives it offers by considering the various behavioral biases of the companies' managers.