GOVERNMENT POLICIES, MARKET IMPERFECTIONS, AND FOREIGN DIRECT-INVESTMENT

The internalization/eclectic theory of foreign direct investment includes the important insight that government policies create market imperfections, which make foreign direct investment an economically rational strategic alternative for firms. This paper reexamines the effects of government policies on market imperfections and foreign direct investment (FDI). It broadens and refines the analysis of the impact of government policies by developing the following arguments: (1) There is a wide range of government policies that affect firms' FDI decisions via their effects on market imperfections. (2) There are numerous dimensions of variability in government policies that need to be identified in order to understand fully the effects of government policies on market imperfections and hence FDI flows. (3) Some of the effects of government policies on market imperfections and FDI are the opposite of those previously noted in the FDI literature. (4) The effects of government policies vary across the several individual components of FDI flows. The paper thus examines the following variables and relationships more extensively and precisely than has the previous literature: government policy variables as causal factors affecting FDI; market imperfection variables as intervening factors in the causal connections between government policies and FDI; and the multiple indicators of the various dimensions of FDI as dependent variables.