Tax Incentives and Their Impact on The Quality of Foreign Investments

Foreign direct investment (FDI) plays a crucial role in sustainable economic growth by providing financial resources, technology transfer, and job creation. For transition economies such as Uzbekistan, enhancing the quality of foreign investment is vital to achieve long-term competitiveness. In recent years, Uzbekistan has implemented tax reforms, including exemptions and VAT relief, to attract FDI. Comparative experiences of Ireland and Singapore show that targeted tax incentives combined with institutional stability significantly raise high-tech and innovative investment inflows. While the relationship between tax incentives and FDI volume is widely studied, less is known about their effect on investment quality, including technological orientation, sectoral diversification, and employment outcomes in transition economies. This study aims to analyze the impact of tax incentives on the quality of FDI in Uzbekistan and compare its outcomes with successful international cases. The findings reveal that tax incentives reduce business costs and increase FDI inflows, which in turn stimulate long-term investments, innovation, sectoral diversification, and job creation. Uzbekistan’s FDI inflows nearly doubled between 2016 and 2023, with the share of industrial investment rising from 35% to 52% and job creation increasing by 80,000. However, compared to Ireland and Singapore, Uzbekistan still attracts a smaller share of high-tech investment. This study demonstrates that in Uzbekistan, gradual selective liberalization and sector-specific incentives are more effective for improving investment quality than broad exemptions. Policymakers should shift the focus from quantitative FDI growth to qualitative indicators, prioritizing innovation, R&D, and long-term sectoral development to ensure sustainable economic growth.