All markets need institutions in order to function properly. From the simplest exchange transaction that is governed by the rules of business, cultural norms or traditions to the most complex decision-making procedure that involves strategic uncertainty and limited information, our behavior is shaped by formal and informal institutions that help to facilitate order in daily social and economic interactions and reduce uncertainty in exchange. While an explicit acknowledgement of this fundamental role of institutions in socio-economic life might seem superfluous and obvious to the reader with a non-economics background,188 it is a fact that the prevailing neoclassical theory treats institutions as a highly abstract matter as well as exogenously given, and thus inconsequential, in economic processes. The New Institutional Economics (NIE) attempts to address this shortcoming from an economic science’s point of view. The final part of this chapter will, therefore, review some of the main ideas of this theory, along with complementary, yet different, approaches suggested by two NIE scholars — Douglass North and Oliver Williamson — that are relevant to the analysis at hand. This process will serve to highlight the role and importance of institutions in general as well as their significance for FDI government competition in particular.


Foreign Direct Investment Transaction Cost Governance Structure Institutional Environment Institutional Economic 
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