In this chapter some of the major characteristics of home and host government behaviour that are considered to be “strategic” are examined. It is to be expected that such policies will influence FDI through the impact of home country policies on ownership and internalization advantages and the impact of host government policies on location advantages. Japanese and host government FDI-related policies are then summarized. The resource and welfare implications of such policies are also examined.

Strategic behaviour refers to policies to promote economic activity in certain industries because of the impact of those industries on long-term growth of incomes and employment. By fostering backward linkages to the local economy and forward linkages to markets for goods and services, and by promoting knowlege and skills accumulation, governments can “create” comparative advantages independent of traditional factor endowments. Home government policies include trade protection and support policies that target the growth of certain industries; host government policies induce foreign investment in certain industries to catch up to industrialized economies and to create comparative advantage.

Teece (1991) summarizes what is known about the benefits and costs of home government support policies: i.e., subsidies and protective measures targeted at certain industries. From the available evidence, he makes several observations. First, targeting has a better chance of success when it is used for the purpose of “catching up” than for advancing the technological frontier, because of the greater efficiency with which resources can be used when the way forward is known. Second, targeting works better when governments can co-ordinate policies to ensure all are supportive of the economic objective. He notes that, with the possible exception of Japan, government guidance is less and less used in industralized countries today. Firm-level studies suggest that firms' ownership advantages, such as organization and management, are more important to competitiveness than are public sector support policies.