Effects of government policies on foreign direct investment as a strategic choice of firms: an expansion of internalization theory

Abstract

Government policies are integral to the internalization theory of foreign direct investment (FDI). However, the role of government policies in affecting FDI as a strategic choice of firms has not been fully explored. This article therefore expands the analysis of the role of government policy in the internalization theory of FDI. Some government policies reduce market imperfections while others create them. Some of those policies and their effects on market imperfections furthermore make FDI less attractive as a strategic alternative, while other policies and their effects on market imperfections make FDI more attractive. This study also argues that a comprehensive integration of political variables in FDI theory requires several levels of analysis of both political and economic variables.