This chapter examined governments' influence on firms' decisions to invest in foreign countries. By their choice of policies, both host-country and home-country governments encourage and restrict FDI. We also explored the factors that influence negotiations between a hostcountry government and a firm contemplating FDI. The chapter made the following points:

1. An important determinant of government policy toward FDI is political ideology. Political ideology ranges from a radical stance that is hostile to FDI to a noninterventionist, free market stance. Between the two extremes is an approach best described as pragmatic nationalism.
2. The radical view sees the MNE as an imperialist tool for exploiting host countries. According to this view, no country should allow FDI. Due to the collapse of communism, the radical view was in retreat everywhere by the end of the 1990s.
3. The free market view sees the MNE as an instrument for increasing the overall efficiency of resource utilization in the world economy. FDI can be viewed as a way of dispersing the production of goods and services to those locations around the globe where they can be produced most efficiently.
4. Pragmatic nationalism views FDI as having both benefits and costs. Countries adopting a pragmatic stance pursue policies designed to maximize the benefits and minimize the costs of FDI.
5. The benefits of FDI to a host country arise from resource-transfer effects, employment effects, balance-of-payments effects, and its ability to promote competition.
6. FDI can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available. Such resource transfers can stimulate the economic growth of the host economy.
7. Employment effects arise from the direct and indirect creation of jobs by FDI.
8. Balance-of-payments effects arise from the initial capital inflow to finance FDI, from import substitution effects, and from subsequent exports by the new enterprise.
9. By increasing consumer choice, foreign direct investment can help to increase the level of competition in national markets, thereby driving down prices and increasing the economic welfare of consumers.
10. The costs of FDI to a host country include adverse effects on competition and balance of payments and a perceived loss of national sovereignty.
11. Host governments are concerned that foreign MNEs may have greater economic power than indigenous companies and that they may be able to monopolize the market.
12. Adverse effects on the balance of payments arise from the outflow of a foreign subsidiary's earnings and from the import of inputs from abroad.
13. National sovereignty concerns are raised by FDI because key decisions that affect the host country will be made by a foreign parent that may have no real commitment to the host country and the host government will have no control over them.
14. The benefits of FDI to the home (source) country include improvement in the balance of payments as a result of the inward flow of foreign earnings, positive employment effects when the foreign subsidiary creates demand for home-country exports, and benefits from a reverse resource-transfer effect. A reverse resource-transfer effect arises when the foreign subsidiary learns valuable skills abroad that can be transferred back to the home country.
15. The costs of FDI to the home country include adverse balance-of-payments effects that arise from the initial capital outflow and from the export substitution effects of FDI. Costs also arise when FDI exports jobs abroad.
16. Home countries can adopt policies designed to both encourage and restrict FDI. Host countries try to attract FDI by offering incentives and try to restrict FDI by dictating ownership restraints and requiring that foreign MNEs meet specific performance requirements.
17. A firm considering FDI usually must negotiate the terms of the investment with the host government. The object of any negotiation is to reach an agreement that benefits both parties. Negotiation inevitably involves compromise.
18. The outcome of negotiation is typically determined by the relative bargaining powers of the foreign MNE and the host government. Bargaining power depends on the value each side places on what the other has to offer, the number of comparable alternatives available to each side, and each party's time horizon.