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I – INTRODUCTION / STATEMENT OF THE PROBLEM

Economic development generally refers to the sustained, concerted actions of policymakers and communities that promote the standard of living and economic health of a specific area. It also means the quantitative and qualitative changes in the economy. Such actions can involve multiple areas including development of human capital, critical infrastructure, regional competitiveness, environmental sustainability, social inclusion, health, safety, literacy, and other initiatives . From the above, it is obvious that economic development is a permanent preoccupation of policy makers in all economies worldwide and more so in developing economies which are still not fully industrialized. Huge capital investment is necessary for economic development. This is lacking in developing countries as they are principally consumer based economies as opposed to the producer based economies that constitute the developed world.

The classical economists are of the view that most developing countries are endowed with numerous natural resources, which when refined, could serve as engine for growth and development. They argue that, because of the low-income base and the high propensity to consume of the occupants of these developing countries, their levels of savings are low, which further translate to low capital formation and low productivity hence, the existence of high rate of poverty. These groups of thinkers therefore, suggested that to break this vicious circle of poverty, Foreign Direct Investment (FDI) must be encouraged to complement domestic investment so as to provide these developing countries with their desired growth and development .

Capital flows is a term used to describe the movement or flow of money as it relates to activities such as investing, trading goods and services, or the operation of a business enterprise. The term is often used to describe internal processes within a business that involve purchasing necessary equipment and materials, as well as the costs associated with the research and development of new business opportunities. Governments are also concerned with various types of capital flows, as the movement of the money supply within the economy is an important indication of the current health status of that economy .

Among the different forms of capital flows , academics and policymakers, talk about Foreign Direct Investment (FDI) the most. This is because of several benefits of FDI and its importance in the world economy vis-à-vis other forms of capital flows. In the past years, FDI has been the dominant form of capital flow in the global economy, even for developing countries.

Foreign Direct investment refers to the net inflow of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor. It can also be defined as an investment made by a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation’s stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.

The investing company may make its overseas investment in a number of ways – either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through a merger or joint venture. The accepted threshold for a foreign direct investment relationship, as defined by the OECD , is 10%. That is, the foreign investor must own at least 10% or more of the voting stock or ordinary shares of the investee company . Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development. In the past decade, FDI has come to play a major role in the internationalization of business.

Reacting to changes in technology, growing liberalization of the national regulatory framework governing investment in enterprises, and changes in capital markets profound changes have occurred in the size, scope and methods of FDI. Recognizing that FDI can contribute to economic development, all governments want to attract it. Indeed, the world market for such investment is highly competitive, and developing countries, in particular seek such investment to accelerate their development efforts. With liberal policy frameworks becoming commonplace and losing some of their traditional power to attract FDI, governments are paying more attention to measures that actively facilitate it. Still, the economic determinants remain key. What is likely to be more critical in the future is the distinctive combination of locational advantages and, especially, created assets that a country or region can offer potential investors, Policymakers employ incentives which are fiscal, financial or psychological interventions of an actor with the aim of provoking in economic agents, behaviours that are advantageous to them or to the community (if the former actor is a public power) on the part of one or many other actors . The increasing mobility of international firms and the gradual elimination of barriers to global capital flows have stimulated competition among governments to attract foreign direct investment, often through tax incentives .

This is especially so with emerging economies such as that of Cameroon in which tax incentives abound. In Cameroon these tax incentives take the form of reduced corporate income tax rate, loss carry forwards, tax holidays, investment allowances, investment tax credits, reduced tax on dividends and interests paid abroad, preferential treatment of long term capital gains, deduction for qualifying expenses, zero or reduced tariffs, employment based deductions, tax reduction for foreign currency earnings as well as the institution of the Industrial Free Zone and Special Free Zone Tax Regime. They are stated mostly in the General Tax Code and its various texts of application, in Law n 2002/004 of 19th April 2002 instituting the Investment Charter of the Republic of Cameroon and in Private Finance Initiatives adopted by Cameroon since 2006. The effectiveness of these tax incentives in attracting into the country the much needed Foreign Direct Investment which is a stimulant to economic development will be the focus of this dissertation.

II – LITERATURE REVIEW
Firms are motivated by various aspects to choose FDI as a mode of entry to foreign markets. These aspects are partly described in the much referred Dunning’s OLI-theory. Dunning (1993) presents three conditions that do motivate firms to choose FDI as a mode of entry to foreign markets. These are ownership advantages (O), location advantages (L) and internalization advantages (I). FDI inflows to a country depend largely on the presence in that country, of a certain critical minimum of FDI determinants. The determinants are among the factors that give MNEs (Multinational Enterprises) the confidence and interest to invest their massive and expensive capital in foreign markets. Among the FDI determinants that MNEs look for are the presence of economic, political and social stability; and rules regulating entry and operations of businesses. Others are standards of treatment of foreign affiliates; business facilitation (including, inter-alia, investment incentives and thereby tax incentives; market size, growth, structure and accessibility; raw materials, low cost but efficient labour force and physical infrastructure in form of ports, roads, power and telecommunication.Honest P. NGOWI(1985). Primarily, Tax Incentives do not figure high on the list of FDI determinants. In fact, many economists disdain tax incentives, seeing them as at best ineffective but losing revenue for the Treasury, and at worst as expensive distortions that actually reduce the true value of output.

To Joel Bergsman(1999), most incentive schemes encountered in most countries are simply not effective. They attract very little additional investment. And they have costs: they are a drain on the Treasuries of the countries that grant them, they are sometimes counter-productive because they make investment procedures too complex, and they sometimes lead to significantly greater corruption. Jacques Morisset(2003) is in line with this postulate as he finds the impact of tax incentives on foreign direct investment ambiguous. According to him, over the past few decades, time-series econometric analysis and numerous surveys of international investors have shown that tax incentives are not the most influential factor for multinationals in selecting investment locations. More important are such factors as basic infrastructure, political stability, and the cost and availability of labor. Both analysis and surveys have confirmed that tax incentives are a poor instrument for compensating for the negative factors in a country’s investment climate. The literature about the effectiveness of taxes on foreign direct investment remains fairly inconclusive. In particular, fiscal incentives may entail the risk that distortionary effects may also come up. This is possible, since firms may take advantage of changes of tax-avoidance and tax-evasion or other industries may also ask for an equal treatment (Shah, 1995).

It would however be misleading to assume that tax incentives do not attract FDI. This view is held by Jacques Morisset and Ned Pirina(2000). To them, the relative little importance of tax policy does not mean that it does not exert any impact on FDI. Looking at foreign direct investment figures, it is certainly not a coincidence that FDI in tax haven countries in the Caribbean and South Pacific grew more than fivefold between 1985 and 1994, to over $200 billion. Ireland’s tax policy has been generally recognized as a key factor in its success to attract international investors over the past two decades. In fact, the simple position described above is not completely accurate. It is not true that tax policy and incentives fail to attract investors; they do affect the decisions of some investors some of the time.

More recent studies have proved that the impact of tax incentives in attracting FDI can be better appreciated taking into consideration certain factors such as the type of investment or market envisaged by the Multinational as well as its activity or age. First investors emphasize more on incentives (Davidson,1980), such as subsidies, that reduce cost of establishment, while firms that reinvest, prefer more incentives that deal with taxation, such as tax-holidays (Mintz,1992; Shah,1995), accelerated depreciations and loss-carry forwards and loss-carry backwards (Hines, 1998). In other words, firms that have started their activities in a new country have different preferences about their motives in relevance with firms that expand their activities (Rolfe et al., 1993). For this reason, specific incentives, such as repatriation scheme, was significant only for the decision of the initial investment (Coyne (1995).

There is growing evidence that low taxes might be a key factor for firms that are not operating in one specific but multiple markets such as Internet related business, insurance companies and banks. Establishing a subsidiary in a low tax country gives them the opportunity to develop tax avoidance strategies. It is indeed difficult for any one country to claim the right to tax the holding company if its operations have taken place in multiple markets at the same time.

FDI inflow into Cameroon was very low in the early 1990s but picked up in the latter half of the decade, peaking in 1998 at US$215 million when privatization increased and price controls were abolished. FDI subsequently fell to US$73 million in 2001, but rose to its highest level ever in 2002 at US$602 million, reflecting the sale of the national power company, SONEL, and the Chad-Cameroon oil pipeline project. Inflows have maintained an average US$300 million for the 2003–2009 time periods. Clearly this data sourced from the Foreign Agricultural Investment Country Profile, Cameroon FAO does not attribute this FDI inflow to the availability of tax incentives in the country.

Cameroon receives very little Foreign Direct Investments. Between 2007 and 2008, the recorded net FDI flow was approximately 1.2% of the GDP for each year. The most targeted sector remains that of extraction industries, particularly oil drilling. The United States and France are the country’s primary investors. (Cameroon Business Mission Fact Sheet 2010-2011).

There is a real need to carry out research as to the impact that tax incentives have on attracting Foreign Direct Investment in Cameroon over the past years especially since the coming into force of Law n 2002/004 of 19th April 2002 instituting the Investment Charter of the Republic of Cameroon and Private Finance Initiatives existing since 2006. III – RATIONALE FOR THE STUDY/RESEARCH QUESTION

In its determination to build a competitive and prosperous economy by boosting investment and savings, and attain its economic and social objectives, the Republic of Cameroon has opted for, among other measures: -The promotion of entrepreneurship as the prime mover of Cameroon’s creative potential, which is a pre-condition for setting up viable and competitive enterprises, and a decisive factor in providing a lasting solution to unemployment and poverty; – The promotion and active boosting of investments and exports so as to develop entrepreneurial potential; -The institution of an attractive tax system with incentives for investors, which includes specific taxes on production equipment, and addresses the need for export competitiveness requirements . Conscious of its economic and social and responsibilities vis-à-vis its citizens, the Government of Cameroon has instituted a framework of tax incentives to boost economic development through the inflow of Foreign Direct Investment and as such realize its developmental objectives.

Tax incentives have as direct consequence, the reduction of tax revenue for the State. There is therefore the necessity to carry out in depth studies as this thesis proposes to do in order to determine if the tax incentives offered by the Cameroon tax legislation have so far attracted enough Foreign Direct Investment to outweigh their negative impact on the State’s treasury. The current Cameroonian tax legislation abounds with tax incentives which are aimed at inducing Multinational firms to implant their businesses in the country and as such bring in Foreign Direct Investment which will in turn boost economic development. Have these tax incentives so far succeeded in increasing the inflow of Foreign Direct Investment into the economy of Cameroon? That is the question this dissertation primarily seeks to answer.

IV – METHODOLOGY

The methodology to be employed in this thesis on the effectiveness of tax incentives in attracting Foreign Direct Investment to Cameroon will be Qualitative Empirical Research as well-compiled qualitative research enhances the comprehensibility of social phenomenon . Therefore, the following basic steps in the qualitative approach to empirical research will be used: -Designing a research question and hypothesis to be tested; -Collecting data;

-Analyzing data;
-Presenting and analyzing results.

1 – The research question as afore-mentioned is if tax incentives employed in Cameroon have succeeded in attracting FDI into the country in the post era of the institution of the Investment Charter, Private Finance Initiatives and provisions of the General Tax Code relating to investment promotion and the special tax regime for investments. Available literature on the subject suggests a negative response. The hypothesis to be tested will thus be that ‘tax incentives have not succeeded in attracting substantial FDI to Cameroon’ In the course of the research, we would expand observable implications of our study. 2 – Methods for collecting data in qualitative empirical research are interviews, direct observation, questionnaires, document and literature analysis. The methods detailed here-below will be used in collecting data in this thesis in which our focus group includes mainly, policymakers and implementers of the Ministries in charge of Finance and Trade, and Multinational companies which are fiscally domiciled at the Large Taxpayers’ Unit (comprised of taxpayers with a turnover of above a hundred billion francs CFA) of the General Directorate of Taxation. Our sample size would constitute about 250 Multinational Enterprises. -Individual face to face and telephone interviews will be conducted in other to enhance anonymity and avoid copied responses that may occur with collective interviews with the competent authorities on the raison d’être of the various tax incentives contained in the General Tax Code, Private Finance Initiatives and the Investment Charter of the Republic of Cameroon. -Close ended questions will be employed in the electronically distributed questionnaires that will be used to collect data from the Management of multinational firms in order to determine if tax incentives are determinants in the location decision of their firms.

The choice of this questionnaire design is motivated by the ease with which preliminary analysis will be conducted as close ended questions are ideal for calculating statistical data and percentages, as the answers set is known. Closed ended questions can also be conveniently asked to different companies at different intervals to efficiently over time. The electronic method of distribution of questionnaires will be less time consumer for the researcher and target population. It will also increase the chances of honest responses due to its anonymous nature. -Document and literature analysis (from data available at some of the departments of the Ministries in charge of Trade and of Finance especially the General Directorate of Taxation).

They will be employed to determine if more Multinationals which are vectors of FDI have implanted in the country in the period after the introduction of tax incentives into the tax system. 3 – The abundant data collected will be analyzed by transcription and coding. Data will be transcribed as soon as possible after interviews in order to maximize reliability. Coding will be used for breaking down data collected from questionnaires into component parts which will be given names or categories. 4 – In presenting the results obtained, the findings will be faithful, clearly and accurately written. All the information relevant to the question will be concisely produced in charts and graphs in order to facilitate presentation and comprehensibility. The data collected will be analyzed by typology, that is, the creation of a system of classification, a list of (mutually exclusive) categories. This presentation and analysis of collected data will blend with the second part of the thesis which will be more practical as opposed to the first part that will be mainly theoretical.

V – OVERVIEW OF PART ONE

TITLE ONE: THE ROLE OF FOREIGN DIRECT INVESTMENT IN DEVELOPING ECONOMIES CHAPTER ONE: Economic challenges faced by developing economies CHAPTER TWO: Promotion of economic development through Foreign Direct Investment

TITLE TWO: TAX INCENTIVES APPLICABLE IN THE CAMEROONIAN TAX LEGISLATION CHAPTER ONE: General classification of tax incentives
CHAPTER TWO: Tax incentives specific to Cameroon

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