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Economic Welfare, International Business and Global Institutional Change

Edited by Ram Mudambi, Pietro Maria Navarra and Giuseppe Sobbrio

The distinguished authors in this volume address the fundamental causes for such heterogeneous international experiences, placing particular emphasis on the role of institutions. They demonstrate how the study of economic development is increasingly linked to the development of institutions, which allow for more complex exchanges to occur in markets and societies. Institutions can be understood as rules or constraints that channel individuals' actions in specific directions, and can be formal or informal depending on their genesis. The book highlights the connection between institutions and economic welfare by examining countries at different stages of development. Although the authors' study material effects, they also look at individual well-being which is more strongly influenced by the non-material products of institutions such as opportunity, freedom and relationships. They move on to highlight the role of institutions in global business, in terms of innovation, entrepreneurship and foreign direct investment. In the concluding chapters they focus on the actual process of transition from one institutional framework to another. Amongst other examples, they examine reforms to international financial institutions and constitutional adjustments in transition countries.
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Chapter 10: Political Orientation and Multinational Investment Flows into Italy

Ram Mudambi, Pietro Navarra and Giuseppe Sobbrio


Ram Mudambi, Pietro Navarra and Giuseppe Sobbrio 1. INTRODUCTION In the post-Soviet era, governments of all hues tend to view multinational enterprises (MNEs) as sources of scarce investment funds and desirable high value added jobs (UNCTAD, 1997). The ideal MNE investment from the point of view of the local government consists of a single facility with regional and preferably global R&D, production and marketing responsibility. Such a facility is a large employer, with a highly skilled, productive, and high-wage workforce, and a high level of local purchases to generate macro multiplier effects (Young et al., 1994). Whether or not the government takes an activist role in attracting MNE investment, ensuring that the investment is close to the ideal requires an understanding of the forces that underlie the multinational mode of operation (Mudambi, 1998). In their seminal work, Buckley and Casson (1976) analyze the multinational enterprise (MNE) using the tools of transaction cost economics developed by Coase (1937). Here, the MNE is seen as a form of hierarchical international organization that is put in place when the transaction costs involved with using market operations, typically through exports, become too high. Dunning’s (1980, 1988) eclectic or O-L-I paradigm, under which MNE investment decisions are based on ownership, location and/or internalization advantages, can be seen as a means of fleshing out the transaction costs involved in international activity. In the literature, the role of the government is typically subsumed within the location dimension (Davidson, 1980; Mudambi, 1995; Loree and Guisinger, 1995). Thus,...

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