Total Protection: A New Measure of the Impact of Government Interventions on Investment Profitability
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Researchersin the field of internationalbusinessoften requirea measure that capturesthe net effect of governmentpolicieson the profitabilityof directforeigninvestments.RootandAhmed[1978]usedthestatutorycorporatetax rateas a proxyfor the net effect of all governmentinterventions. Horst [1977]and othershavereliedon the effectiverateof protectionor other measuresof tariff levelsto gauge the importanceof tradebarriers in raisingthe profitabilityof foreignand domesticinvestment.But so far these partialindicatorshave yet to be combinedinto a unified comprehensivemeasurethat incorporatesboth tradeand factormarketinterventions on the rateof returnto investment. Progresstowarda unified measurehas been pursuedalong two separate but parallelpaths. One groupof researchers,concernedwith the impact of fiscal incentiveson domesticinvestment,has searchedfor a common denominatorto express the values of the various types of domestic incentives-tax holidays,accelerateddepreciation,cashgrantsandthe like. Partof the problemfacedby this groupof researchershasbeenthe astonishing varietyof incentivetypes. In a surveyof the incentivepolicies of *StephenGuisingeris ProgramHeadandProfessorof InternationalManagement Studiesat the Universityof Texasat Dallas, wherehe also servesas Chairman, Joint Centerfor China-U.S. ManagementStudies. The commentsof MalcolmGillis,DanielSchydlowskyand anonymousreviewershaveimprovedthis papersubstantially. Received:May 1988;Revised:August& September1988;Accepted:October1988. 280
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morethanten developedand developingcountries,Guisinger[1985]identified morethan two dozen differentdomesticincentiveand disincentive instruments. Toexpressthisimmensevarietyof incentiveinstrumentsinvaluesof a single yardstick, researchershave taken severaldifferent tacks. For example, Douglas Yuilland KevinAllen [1986],in their studiesof incentivesin the EC countries,haveconvertedmany,but not all, fiscalincentivesinto cash grant equivalents.Summedtogether,these cash grantequivalentsrepresent the singlecash paymentan investorwould acceptin the initial year of the investmentin lieu of the fiscal incentiveshe is entitledto receive. GaryHufbauer[1975]used changesin the rentalcost of capitalto gauge the effects of fiscal and monetaryinducementsto export-orientedinvestment. The rentalcost approachpermittedHufbauerto incorporateboth cash and non-cash (tax holidays, for example)incentivesinto a single yardstick-in thiscase,the cost of usingcapital.Despitehis focuson export industries,Hufbauerdid not includeincentivesanddisincentivesafforded by tradepolicies.MervynKingandDon Fullerton[1984]utilizedthe concept of the marginaleffectiverateof taxationto examinethe effects of fiscal policies on the net tax paid by investors-the lowerthe effective rateof taxation, the greaterthe protectionafforded the investment.King and Fullertonfoundseveralcasesof negativeeffectivetaxa
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