Answer to Question 1
Firms commonly engage in foreign direct investment when the firms they supply have already invested abroad. This practice of following clients is common in industries in which producers source component parts from suppliers with whom they have close working relationships. The practice tends to result in companies clustering within close geographic proximity to each other because they supply each other's inputs. When Mercedes opened its first international car plant in Tuscaloosa County, Alabama, auto-parts suppliers also moved to the area from Germanybringing with them additional investment in the millions of dollars.
Nations often intervene in the flow of FDI to protect their cultural heritages, domestic companies, and jobs. They can enact laws, create regulations, or construct administrative hurdles that companies from other nations must overcome if they want to invest in the nation. Yet rising competitive pressure is forcing nations to compete against each other to attract multinational companies. The increased national competition for investment is causing governments to enact regulatory changes that encourage investment. The majority of regulatory changes that governments introduced in recent years are more favorable to FDI.
In a general sense, a bias toward protectionism or openness is rooted in a nation's culture, history, and politics. Values, attitudes, and beliefs form the basis for much of a government's position regarding foreign direct investment. For example, South American nations with strong cultural ties to a European heritage (such as Argentina) are generally enthusiastic about investment received from European nations. South American nations with stronger indigenous influences (such as Ecuador) are generally less enthusiastic.
Opinions vary widely on the appropriate amount of foreign direct investment a country should encourage. At one extreme are those who favor complete economic self-sufficiency and oppose any form of FDI. At the other extreme are those who favor no governmental intervention and booming FDI inflows. Between these two extremes lie most countries, which believe a certain amount of FDI is desirable to raise national output and enhance the standard of living for their people.
Answer to Question 2
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Steady State in the Two-Country Model
Key foreign policy agencies