Some normative principles for direct foreign investment
DOI:
https://doi.org/10.13133/2037-3643/10686Keywords:
Direct foreign investment, Globalisation, Externalities, Multinational enterpriseAbstract
Conventional normative analysis of direct foreign investment (DFI) uses Coase's theorem of social cost. The multinational enterprise (MNE) internalizes externalities relating to industrial knowledge which results in allocative efficiency and optimal investment. DFI in the context of liberalised capital markets requires some new welfare economics. We use the theory of contestable markets. When markets are perfectly contestable, DFI is best left to unregulated market forces. More typically, markets will not be contestable and externalities cannot be internalized. First best policy in this case may be government intervention at the source of the distortion, i.e. in the MNE's home country.
JEL: F21, L16, F60
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