Foreign Direct Investment with Tax Holidays and Policy Uncertainty

Alcino Azevedo, Paulo J. Pereira, Artur Rodrigues

Research output: Contribution to journalArticlepeer-review


We study foreign direct investment agreements that entitle firms to a lower tax rate during a tax holiday period. Our model considers both finite and uncertain tax holiday period settings. We show that the tax holiday duration may have, for small tax rate reductions, a nonmonotonic effect on the investment timing. For sufficiently high tax reductions, a longer tax holiday speeds up investment. A higher tax reduction during the tax holiday and a lower uncertainty are shown to have a monotonic effect on the threshold, hastening investment. However, in case of a finite tax holiday, for exceptional high salvage values, a higher uncer- tainty can speed up investment. We show the usefulness of our model to design an optimal incentives package that prompts investment.
Original languageEnglish
Pages (from-to)727-739
Number of pages13
JournalInternational Journal of Finance and Economics
Issue number2
Early online date10 Oct 2018
Publication statusPublished - 1 Apr 2019

Bibliographical note

This is the peer reviewed version of the following article: Azevedo A, Pereira PJ, Rodrigues A. Foreign direct investment with tax holidays and policy uncertainty. Int J Fin Econ. 2018;1–13, which has been published in final form at  This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.

Funding: FCT. Grant Numbers: POCI-01-0145-FEDER-006683, POCI-01-0145-FEDER-006890; ERDF


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