  The $\Delta I=1/2$ rule and direct CP violation $\epsilon'/\epsilon$ in kaon
decays are studied within the framework of the effective Hamiltonian approach
in conjunction with generalized factorization for hadronic matrix elements. We
identify two principal sources responsible for the enhancement of A0/A_2: the
vertex-type as well as penguin-type corrections to the matrix elements of
four-quark operators, which render the physical amplitude renormalization-scale
and -scheme independent, and the nonfactorized effect due to soft-gluon
exchange, which is needed to suppress the $\Delta I=3/2$ $K\to\pi\pi$
amplitude. Contrary to the chiral approach which is limited to light meson
decays and fails to reproduce the A2 amplitude, the aforementioned approach for
dealing with scheme and scale issues is applicable to heavy meson decays. We
obtain A0/A2=13-15 if $m_s$(1 GeV) lies in the range (125-175)MeV. The bag
parameters $B_i$, which are often employed to parametrize the scale and scheme
dependence of hadronic matrix elements, are calculated in two different
renormalization scehemes. It is found that $B_8^{(2)}$ and $ B_6^{(0)}$, both
of order 1.5 at $\mu=1$ GeV, are nearly $\gamma_5$ scheme independent, whereas
$B^{(0)}_{3,5,7}$ as well as $B_7^{(2)}$ show a sizable scheme dependence.
Moreover, only $B_{1,3,4}^{(0)}$ exhibit a significant $m_s$ dependence, while
the other $B$-parameters are almost $m_s$ independent. For direct CP violation,
we obtain $\epsilon'/\epsilon=(0.7-1.1)\times 10^{-3}$ if $m_s(1 {\rm
GeV})=150$ MeV and $\epsilon'/\epsilon=(1.0-1.6)\times 10^{-3}$ if $m_s$ is as
small as indicated by some recent lattice calculations.
