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This paper re-examines the much-debated issue of direct investment incentives. In the light of recent economic literature, we discuss the following questions: What are the expected effects of public funding as a whole? How are we to avoid the pitfalls that are often induced by such public intervention? We argue that the decision to implement a particular incentive, either as a capital subsidy or a tax cut, should not be made without considering some important determinants, including the characteristics of the capital markets, the fiscal treatment of losses, and the rules on international taxation. The debate between neutrality and efficiency is also discussed. Finally, we highlight the usefulness of indicators derived from the models of effective taxation in the policy-making process. The final part of the paper is devoted to an application, in which we measure the cost of capital and the effective average tax rate in order to evaluate the relative efficiency of rival policy instruments. We argue that the granting of a capital subsidy should not be too hastily ruled out.