Locational Competition and Government Intervention

Up to this point, foreign direct investment and the decision to engage in international production have been reviewed exclusively from the firm’s point of view. Even the general considerations of locational factors, which are the domain of the nation-states or — more specifically — their respective governments, have not led to an examination of how government intervention affects both market imperfections as well as FDI flows. Since this issue goes to the heart of the analysis of FDI policy competition, in this intervening part of the chapter a reassessment of the locational dimension is undertaken, which examines the underlying — and potentially conflictual — relationship between firms’ objectives and governments’ interests. In that context, first the neoclassical approach to locational competition is reviewed, followed by an analysis of its implications and shortcomings, which leads to the proposition of an expanded model of FDI policy competition in the final part of this section.