Analyse: Direct foreign investment (DFI) has accelerated since the 1980s in response to changing global competitive conditions.

This thesis integrates the role of financial markets into the industrial organization theory of DFI.

The approach uses the theory of contestable markets to show how capital markets impact upon industrial performance and structure.

In perfectly contestable markets with corporate control oligopoly DFI satisfies Ramsey optimal pricing.

Thus, in static analysis market forces will bring about optimal efficiency in investment markets.

In intertemporal analysis, however, the problem of unsustainability arises.

The essential problem is divergence between the private and social cost of investment.

The first best policy in the case of unsustainability is shown to be ex-ante measures such as investment subsidies but given for specific activities rather than to specific firms.

The policy implications of the model are drawn for the areas of competition and intellectual property rights.