Study On The Incentive Effect Of Preferential Tax Policy On Foreign Direct Investment In China

China began to make use of FDI, which is short for Foreign Direct Investment, in1979when we started to open to outside. During the past twenty two years, FDI benefitsChina’s economic development and is helpful to improve the pareto efficiency.Tax policy,as important factor and measure of macro-control, has great incentive effect on FDI. In thepast years, China offered special preferential tax policy to FDI and oriented to certainlocation. The new Law of Corporate Income Tax was carried out in March2007. Facingthe challenge of intense competition of international tax, many researchers begin to thinkabout whether the strategic readjustment of Corporate Income Tax will affect absorbingFDI, and how to improve related policy. This is what this paper mainly focus on as well.So this paper firstly analyze why host country need FDI, why MNC are willing toinvest outside and which location aspects are taken into account, the necessary of usingpreferential tax policy to encourage FDI by related FDI theory. What is more, chapter3introduces the evolution and current situation of FDI and related Corporate Income TaxPolicy.This paper also set up an econometric model basing on the panel data of44citiesduring1989-2009and prove that the preferential tax policy has significant effect on FDIindeed, especially in midland. However, this effect is no longer as strong as before ineastern cities. To sum up, The New Corporate Income Tax does have negative effect onFDI, but the negative effect is limited. At last, this paper puts forward five suggestions oftax policy to encourage FDI and optimizing the structure of FDI.