Beyond Tax Holidays: Why Investment Facilitation Matters More Than Incentives

By Saumya Amarasiriwardane

For many years, attracting foreign direct investment (FDI) has been a key priority for developing countries. Sri Lanka is no exception. Successive governments have offered tax holidays, duty exemptions, and a wide range of incentives to bring in foreign investors and support economic growth.

Yet, despite these efforts, FDI inflows have remained relatively low and uneven compared to many regional peers. This raises an uncomfortable but important question: are we focusing too much on incentives, while missing the real reasons why investors choose one country over another?

Around the world, the debate is shifting. Instead of asking how many incentives a country should offer, policymakers are increasingly asking a more fundamental question: how easy is it for an investor to actually set up and run a business?

 Increasingly, global experience suggests that while incentives may attract attention, it is the quality of the investment environment, speed, transparency, and predictability, that determines whether investment actually materialises and stays.

Incentives: Visible, but not always decisive

Investment incentives are easy to understand. They reduce the cost of doing business through tax concessions, subsidies, or preferential treatment. For governments, they are also politically attractive because they send a clear signal that a country is open for business.

However, their impact is often limited. Incentives may influence decisions at the margin, especially for footloose industries that can move quickly between locations. But they rarely overcome deeper structural issues such as delays in approvals, weak coordination between agencies, or policy uncertainty.

In simple terms, incentives may attract investors to the door, but they do not guarantee that they will walk in.

Investment facilitation: the real game changer

Investment facilitation is less visible, but far more important. It refers to the entire journey an investor goes through, from initial inquiry and approvals to construction, operations, and expansion. It includes; how fast approvals are granted, how transparent procedures are, how consistent policies remain over time, how effectively institutions solve problems when they arise etc.

Put simply, facilitation is about removing friction. It ensures that once an investor decides to come, they can establish and operate their business smoothly and predictably.

The difference is crucial. Incentives may open the door. Facilitation determines whether investors enter, and whether they stay.

A global shift in thinking

Across the world, countries are beginning to recognise that the traditional “race to the bottom” on incentives is no longer sustainable. As global supply chains evolve, digital economies expand, and international tax rules tighten, investors are placing less emphasis on marginal tax advantages and more on operational certainty.

Delays in approvals, unclear regulations, or sudden policy changes can easily outweigh the benefits of generous tax breaks.

Leading international institutions echo this shift. The OECD has noted that incentives are rarely the decisive factor in investment decisions, with fundamentals such as infrastructure, skills, and a predictable legal environment playing a far greater role. Similarly, UNCTAD emphasises that investment facilitation is becoming central to sustainable investment flows.

From a business perspective, the World Economic Forum highlights that transparency and predictability, not tax breaks, form the foundation of investor confidence.

In fact, effective facilitation is often described as rolling out a “digital red carpet” for investors, removing delays and uncertainty that matter more than fiscal incentives.

Global Shift in Investment Strategy 

Lessons from global experience

Singapore: efficiency as a strategy

Singapore offers one of the clearest examples of facilitation-led growth. At the center of its system is the Singapore Economic Development Board (EDB), which acts as a single point of contact for investors. 

Approvals are fast, coordination across government is strong, and processes are highly predictable. Just as importantly, investors receive continuous support even after entering the country. This strong “aftercare” is one of the reasons many companies repeatedly reinvest in Singapore.

Incentives exist, but they are targeted and secondary to a highly efficient system.

Ireland: strong institutions, not just tax policy

Ireland has become one of the world’s most successful FDI destinations, particularly in technology and pharmaceuticals. While its competitive tax regime is well known, its real strength lies in institutions.

At the center is Industrial Development Authority (IDA) Ireland, which functions as a strategic planner, relationship manager, and long-term partner to investors.

It does not just promote investment, it actively solves investor problems, supports expansion, and ensures long-term engagement. The result is a system where investors not only enter, but expand repeatedly.

Vietnam: consistency and execution

Vietnam offers a particularly relevant example for Sri Lanka. Over the past two decades, it has steadily improved its investment environment through consistent reforms.

A key feature of its strategy is the development of industrial parks and export processing zones, which provide ready infrastructure and streamlined approvals. This effectively builds facilitation into the system itself.

While incentives are used, they are targeted and secondary. The real driver is predictability and execution.

India: balancing reform and incentives

 India has also undergone a major shift. Once heavily reliant on incentives, it now focuses on improving ease of doing business through digitisation, regulatory reform, and sector liberalisation. 

At the same time, it has redesigned incentives to be more targeted and performance-based, linked to production and investment outcomes. This balanced approach- facilitation first, incentives second- has helped India emerge as a major global investment destination.

Thailand: incentives with conditions

Thailand provides another useful example. Through the Thailand Board of Investment (BOI), incentives are granted based on clear criteria such as technology transfer, value addition, and job creation.

In recent years, Thailand has also focused on reducing bottlenecks, speeding up approvals, and improving coordination across agencies. The message is clear: incentives matter, but only when supported by efficient systems.

What this means for Sri Lanka

Against this backdrop, Sri Lanka’s challenges become clearer. The country does not lack incentives. It has offered generous fiscal concessions for years.

The real issue lies elsewhere. Investors continue to face:

• Lengthy approval processes
• Overlapping institutional responsibilities
• Policy uncertainty and frequent changes

In such an environment, even generous incentives lose their effectiveness.

Another critical gap is investor aftercare. Existing investors often struggle to expand or resolve operational issues. This is a missed opportunity, as reinvestment is one of the most stable sources of FDI globally.

The way forward

The policy direction is clear.

First, Sri Lanka needs a shift in mindset, from asking “what can we offer investors?” to “how can we make it easier for investors to operate?”

Second, a truly effective investment single-window system must be established, where approvals are fast, transparent, and coordinated.

Third, investment promotion institutions must evolve into problem-solving agencies, not just promotional bodies.

Fourth, policy consistency must be strengthened. Predictability is as important as incentives.

Finally, incentives themselves should be more targeted and performance-based, focusing on sectors that generate exports, technology transfer, and quality employment.

Conclusion

The global message is increasingly consistent: investors are not only looking for lower costs, they are looking for fewer obstacles. Sri Lanka stands at an important crossroads. With the right reforms, it can reposition itself as a credible and competitive investment destination. But this will require moving beyond a narrow focus on incentives and embracing a broader strategy centered on facilitation.

Ultimately, incentives may open doors, but facilitation determines whether investors stay inside and grow.

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Saumya Amarasiriwardane

Economist

The Ceylon Chamber of Commerce