Over the last two decades the world has seen significant changes in the global economy. The liberalisation of trade and capital movement, accompanied by continually diminishing transportation, information and communication costs, has resulted in greater freedom for firms to internationalise. This has led to the growth of trade and Foreign Direct Investment (FDI), and the emergence of a new international division of labour (NIDL). The process of globalisation has deepened the gap between peripheral and core regions. This has made it even more difficult for disadvantaged old industrial areas outside the economic development nucleus to restructure their economies. For them the attraction of foreign multinational enterprises (MNEs) has been one of the few ways to generate economic growth. FDI is sought after for its potentially benefiting role in producing income, employment and access to assets. Furthermore, it is seen as channel for the diffusion of technology, know-how and innovation. On these accounts inward investment can play a major role in enhancing the regional structure and competitiveness of host countries. Accordingly, policy makers aspire that foreign investors will trigger off multiplier effects for regional economic development. It is thus not surprising that especially peripheral and rundown regions have been vigorously competing for FDI projects. This has regularly resulted in biding wars offering potential investors copious amounts of financial and fiscal incentives regardless of prospective impacts they may generate. As a consequence the costs for attraction have often seemed to surpass the benefits from FDI.

After the definitions of the key terms set up the preliminary basis of the study in the course of the remaining chapter, the next section provides the reader with the historical background and global trends in FDI, followed by the development and structure of UK inward investment and German investments in the UK.

Chapter three examines the theories of FDI and MNEs to understand the reasons why and where firms invest abroad. First, the motivations of companies to undertake outward investment and become MNEs are looked at. Consequently firm specific determinants and choices of location can partly be derived from the motivations for FDI. This is incorporated into the second part of the chapter where different theories of the determinants of MNEs activities, i.e. the determinants of FDI, are reviewed. The cognition of motives for and determinants of FDI is crucial for the general understanding of the subject area and for policy makers to discover locational advantages and disadvantages. Furthermore, the incitements for follow-up investment, which make up an ever growing part of total investment, are discovered in this way. The chapter finishes of with a discussion of empirical results and the summary of the theories.

The next chapter connects the impacts of FDI on the host country with the subject matter of regional economic development. Firstly, positive and negative direct and indirect effects from FDI for host economies are discussed. Secondly, factors that determine the extent of impacts are further scrutinised by falling back upon different concepts regional economic development. The third part represents how government policies can secure initial and follow-up inward investments, and improve the benefits from FDI in respect to quality as well as to quantity.

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