One of the chief goals of the economic policy of the new Georgian government after ‘ Rose Revolution’ in 2003 was to promote the development of private entrepreneurship by creating a favorable business climate. Economic reforms were aimed at ensuring economic growth based on liberalization and private sector development. As a result the volume of foreign capital invested in Georgia annually was increased sharply from 449.8 million U.S. dollars in 2005 to $1190.4 million in 2006 and $ 2014.8 million in 2007.1) The prospects for future development of the process seemed very promising. But the situation changed dramatically after the defeat of Georgian military forces in the war between Russia and Georgia in August 2008. The following official recognition of two separatist regions ( South Ossetia and Abkhazia ) by the Russian government as independent states and there de facto occupation by the Russian military forces destabilized the political – economic situation in Georgia and increased investment risk for domestic as well as foreign investors. Another negative factor for massive attracting of foreign investment resources from the international capital market in such a risky country like Georgia is the global financial crisis , which already demeged all dominant powers ( USA ,EU, Japan and so on ) of the world economy. So , in order to eliminate rapidly the “ lack of investment “ in the national economy it is required to make appropriate changes to the legislation.
The Law of Georgia on Promoting the Investment Activities and Guarantees was adopted on November 14, 1996. It does not grant any particular privileges to foreign or domestic investors.
In theoretical discussions, as well as in practical recommendations of the international finance institutions, more and more firmly established becomes the idea, that creating exceptional conditions for the foreign investors will bring more harm rather than benefit to the Georgian as well as the world economy. The argument is the following: introduction of special privileges for foreign investments will provoke introduction of the similar and more privileges by other countries. In the final end such “competition” inflicts serious harm to the budgets of the initiating countries as well as to the budgets of the other countries. Though, as it is often the case in economics, theory and practice considerably differ from each other. In respect to foreign investments a special regime functions in more than 150 countries of the world. In the process of globalization companies became more mobile and governments have to take it into consideration while working out fiscal policies. Namely, we consider it necessary to introduce considerable tax privileges for foreign investors like “ Tax Holiday “ and “ Investment Tax Privileges “ which means considerable privileges for investments in fixed assets ( buildings, plant and equipment ).
It is worth mentioning that the importance of investment incentives grows against the background of the world economy globalization and international mobility of companies. Econometric studies, which earlier showed non-effectiveness of incentives, have seen recently that investment incentives have turned into more important determiners in defining FDI flows. Particularly when investment incentives are not restricted merely to tax privileges but also involve financial incentives (such as direct grants and loans at favorable interest rates), subsidized infrastructure and services, regulatory privileges (such as exemption from labor and environmental legislation obligations), etc. the experience of which has already been mostly accumulated in Western industrial as well as in developing countries for tens of years. Their experience becomes very important for Georgia today.