The use of regulations coupled with fiscal incentives to guide private investment in industry reflects the view that markets fail to allocate resources according to national priorities. These priorities are often embodied in development plans, and the regulatory and tax systems are used to ensure that plan priorities are reflected in the pattern of private investment. Other objectives include prevention of industrial concentration, promotion of regionally balanced industrial development and public sector control over key industries.
These methods have been used to guide private investment in industry at one time or another in many countries, including Benin, Brazil, Ethiopia, India, Indonesia, Liberia, Malaysia, Mauritius, Mexico, Pakistan, Sri Lanka, Tanzania, Togo and Zambia. Perhaps the most common tool of investment regulation is the granting by governments of industrial licences for the creation of new industrial capacity according to their projections of future demand. Studies of Brazil, Egypt, India, Indonesia, Mexico, Pakistan and Spain, however, indicate that industrial licensing involves unexpected costs but delivers few of the expected benefits. The systems are often too complex and implemented ad hoc. Some developing countries, notably in East Asia and Latin America, have avoided using rigid systems to influence the pattern of investment. Their resources have been better able to respond to changes in incentives following trade liberalization and to flow to industries offering the highest financial returns. Firms in these countries are motivated to be more competitive since there are few legal restrictions to entry by new firms. Such benefits have prompted some countries to streamline their licensing systems. Others have tried to dismantle their systems gradually. One approach is to relax restrictions and raise the lower limit for investments that require licenses.