Introduction

As the globalization of the world economy continued over the last decade or so, the world witnessed phenomenal increases in the volume of foreign direct investment (FDI). According to the International Monetary Fund, FDI to developing and transitional economies grew from US$18.6 billion in 1990 to US$83.0 billion in 1995 (see IMF, 1996). This trend is likely to continue. The increased importance of FDI is now well recognized and many rules on FDI have been incorporated in the Articles of the World Trade Organization (WTO) set up in 1995. One of the remits of the WTO is to eliminate impediments to FDI.

In this and the following chapters of this book we deal extensively with various aspects of FDI, such as employment promotion, international inflow and outflow of firms, and lobbying for FDI, and we investigate the properties of a number of alternative optimal policies towards FDI such as profit taxes, local content restrictions, and FDI-promoting subsidies.

The theoretical literature on FDI is very large with several strands and ramifications.Broadly speaking, there are three strands in the literature coming respectively from international trade theory (see, for example, Brander and Spencer, 1987; Dixit, 1984; Ethier, 1986; Ethier and Horn, 1990; Glass and Saggi, 1999; Helpman, 1984b; Hillman and Ursprung, 1993; Hortsmann and Markusen, 1987, 1992; Katrak, 1977; Lahiri and Ono, 1998a, 1998b, 2003; Motta, 1992; Ono, 1990; Petit and SannaRandaccio, 2000; Smith, 1987; Yabuuchi, 1997), public finance (see, for example, Devereux and Griffith, 1996; Haufler, 2001; Haufler and Schjelderup, 2000; Haufler andWooton, 1999; Janeba, 1995; Keen, 1991; Wildasin, 1989), and international business organization (see, for example, Casson and Pearce, 1987; Dunning, 1993).