July 16, 2024 

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FOREIGN DIRECT INVESTMENT: The acquisition of controlling interest in foreign firms and businesses from one country in another country. Abbreviated FDI, foreign direct investment can also take the form of constructing factories, structures and equipment (or any form of physical capital) in foreign soil. FDI does not include foreign investment into the stock markets (portfolio investment). Most economists consider foreign direct investment more useful than portfolio investment since this last one is generally regarded as temporal and can leave the foreign country at the first sign of trouble. FDI on the other hand, is considered more durable and with larger economic (potential) benefits.

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Relatively complex government organizations that operate according to rules and procedures to implement the programs and policies of political leaders. A bureaucracy is a complex organization that usually contains hundreds or even thousands of employees, each with different duties and responsibilities. Bureaucracies exist in all types of organizations -- private, public, government, business, charities, corporations, even households. The study of public choice indicates that government bureaucracies are one source of government inefficiency. Other sources are politicians, voters, and special interest groups.
Complex bureaucratic organizations assume the task of implementing the policies and programs inacted by governments. Political leaders establish the policies and bureaucracies carry them out. Congress might vote for a change in tax laws, but the Internal Revenue Service is charged with implementing the change. However, it's not "bureaucracies" per se that carry out the policies, but people employed by the bureaucracies, government workers.

These people, these government bureaucrats, carry out the policies and programs according to specific rules and procedures. These rules are the good and bad of bureaucracies. The good is that they enable the implementation of policies and programs in an orderly fashion, not guided by the capricious whims of government workers. The bad is that they prevent workers from assuming personal responsibility, preventing the incentives that are essential for an efficient allocation of resources.

Following Orders

A bureaucracy is a complex organization that, more often than not, contains hundreds or even thousands of employees, each with different duties and responsibilities. Although the word government is usually added to the word bureaucracy (and make no mistake, government is not shy when it comes to complex bureaucracies), bureaucracies exist in all types of organizations -- private, public, government, business, charities, corporations, even households.

Most major corporations are structured as complex bureaucracies. So too are large, nonprofit charities. However, because the public sector tends to have the largest bureaucracies, government bureaucracies tend to get the most notoriety. Moreover, while bureaucracies are a prime source of public sector inefficiency, they also contribute to inefficiency that exists in private sector.

Inherently Inefficient

So, the question arises: Why are bureaucracies inefficient? The answer rests with the nature of complex organizations.
  • Responsibility: At the top of the list is the assignment of responsibility to those working in a bureaucracy. In a complex organization, whether public or private, individuals can avoid personal responsibility for their actions. They can blame the rules. They can blame others.

  • Management: As the size and complexity of an organization increases, the ability to exert control decreases. The "head" of a one-person organization has complete control over that "one person." The "one person" carries out the dictates of the "head" without error. However, the head of a one-thousand person organization cannot exert the same degree of control over all members.

  • Information: Part of the management problems arise due to imperfect information. As the dictates of the head are passed down through the organizational structure, the information is bound to be misunderstood. The head might want 5 copies of a 100 page report and end up with 500 boxes of paper clips.
Once again, these problems are most pronounced with public sector bureaucracies, but also arise in private sector bureaucracies. While inefficiency is less pronounced in the private sector to the degree that individual responsibility can be assigned and enforced, it does not disappear entirely.

Maximizing Utility

A key to bureaucratic inefficiency, just like other sources of government inefficiency, is utility maximization. Individual members seek to maximize their own utility. The pursuit of individual satisfaction, however, often conflicts with the pursuit of organizational goals. An individual, for example, might use organization resources to create a more comfortable, but unneeded, work environment (large office, expensive desk, unnecessary travel). Or an individual might maximize utility by minimizing work effort (long lunch breaks, extra time off, sluffing duties onto other employees). Once again, this is a recipe for inefficiency.

A Special Interest

Another key to bureaucratic inefficiency, especially for the public sector, is that bureaucracies operate as special interest groups. The Department of Defense, for example, has more to gain or lose from government spending on national defense than the rest of society. The Environmental Protection Agency has more to gain or lose from environmental regulations than the rest of society. They are thus motivated to enhance their slice of the government pie, even though such enhancement is not needed not efficient.

In particular, the continued existence of a government bureaucracy is dependent on the amount of tax dollars appropriated. A government bureaucracy, as such, is motivated to act just like any private special interest group. Its members are bound to take every action legally allowed (and perhaps some that are not) to convince political leaders to support their organization. This is yet another ingredient in the recipe for inefficiency.

Other Sources of Government Failure

Government bureaucracies are not the only source of government failures. Three other noted sources are politicians, voters, and interest groups.
  • Politicians: These are members of society who seek elected offices. Problems and inefficiencies arise because politicians, like all human beings, seek to maximize their own utility. This pursuit can and does conflict with doing what's best for the economy.

  • Voters: People, citizens of a nation, also seek to maximize their own utility. Two rational choices they make in this pursuit are to NOT be informed (rational ignorance) and to NOT participate in the political process (rational abstention). Such "apathy" means that elected leaders can ignore their preferences.

  • Interest Groups: While some people have little or no involvement in the political process, others have a great deal of involvement. These people, who also seek to maximize utility, have more to gain or lose from particular government actions and are thus motivated to act accordingly, usually by forming special interest groups.


Recommended Citation:

GOVERNMENT BUREAUCRACIES, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2024. [Accessed: July 16, 2024].

Check Out These Related Terms...

     | public choice | voting problems | median voter principle | logrolling | voting paradox | government failures | rational ignorance | rational abstention | voting rules | special interest groups | political entrepreneurs |

Or For A Little Background...

     | market failures | government functions | public finance | efficiency | public sector | private sector | utility maximization | market efficiency | fifth rule of imperfection |

And For Further Study...

     | capture theory of regulation | rent seeking | Tiebout hypothesis | principal-agent problem |

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