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Answer :
Market failures alone are insufficient to explain Foreign Direct Investment (FDI). To fully understand FDI, it is necessary to consider the roles of power and trust.
While market failures can certainly influence FDI, they do not provide a comprehensive explanation on their own. FDI involves cross-border investments made by firms in order to establish or expand their operations in foreign countries.
Market failures, such as imperfect information, externalities, or public goods, can create inefficiencies and distortions in domestic and international markets. However, these market failures do not fully capture the complex dynamics of FDI.
Power and trust play crucial roles in driving FDI. Power refers to the ability of one party to influence or control another party's decisions or outcomes. In the context of FDI, power imbalances between countries can shape investment decisions.
Stronger economies or multinational corporations may exert power to secure favorable terms or concessions from host countries. Trust, on the other hand, is built on confidence, reliability, and credibility between parties.
Trust is vital in mitigating the risks and uncertainties associated with FDI. Investors need to trust that host countries will uphold their commitments, protect property rights, and provide a stable business environment.
Hence, understanding FDI requires acknowledging the significance of power dynamics and the establishment of trust between parties involved, in addition to recognizing market failures.
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