Introduction

Foreign firms locate themselves in a host country for a number of reasons. It could be for lower labour costs in the host country. For example, many Japanese firms make foreign direct investments in China as labour costs there are much lower than those in Japan. Typically, in such cases the commodities produced in the host country are exported in their entirety to a third country (called the consuming country).

FDI also takes place in order to have access to a market which is otherwise not penetrable. The lack of market access can be due to two reasons. The first is trade restrictions in the form of tariffs or quotas. For example, many US firms invest in Ireland and export their produce to the rest of the European Union member countries, and thus avoid the common external tariff imposed by the European Union (see, for example, Barry and Bradly, 1997). Japanese investments in the UK are also for similar reasons. The second reason is frictions between the consuming country and the home country of the foreign firms caused by massive exports directly from the home country to the consuming country. In such cases the consuming country typically imposes restrictive import quotas, and the only way the firms in the home country can export more to the consuming country is via FDI.

In the above circumstances FDI often creates conflicts between the host country and the consuming country.