Temporary investment incentives and divestment by foreign firms

Abstract

Many countries provide temporary incentives to attract foreign investment, in the belief that these temporary benefits may entice firms to remain in the country. We study the exit decision by multinationals, which were established in Puerto Rico under a temporary incentive program. Under this program, benefits were reduced every 5 years. Our results indicate that whenever benefits are reduced, the probability of firm exit increases. This effect is more pronounced for firms using less skill-intensive technologies, for those investing in areas that do not develop agglomerations, and for firms coming from regions that are well acquainted with Puerto Rico. Our evidence shows that US and Spanish firms are more sensitive to the reduction of benefits than firms from other countries. In addition, US firms coming from states where Puerto Rican communities are large are particularly sensitive to the reduction of benefits.