Abstract: It is an article of faith — among politicians as well as scholars — that government policies have the potential to influence the extent and nature of economic activity, particularly when policies impede the normal functioning of business. Examples include regulatory regimes that discourage business formation, legal systems and institutions that make it difficult to execute and enforce commercial contracts, and tax systems that impose excessive burdens on income–producing activities. The desire of most governments to attract foreign direct investment (FDI) directs special attention to the way in which policies affect the location and activities of multinational firms.