Abstract
This chapter discusses foreign direct investment and market performance. In recent years, economists' analysis of the causes of foreign direct investment has moved away from macroeconomic explanations to sector-specific explanations. The chapter explains the occurrence of the multinational firm, starting from a coherent model of profit-maximizing behavior and moving to empirical predictions about its incidence, behavior, and welfare significance. The knowledge of the most probable source of market discipline is valuable for purposes of both research and policy. Policies toward competition, trade, and foreign investment in one country spill over and affect market performance in its trading partners. Issues of policy assignment and interdependence, familiar in international macroeconomics, are clearly present at a microeconomic level as well.
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