Domestic, vertical, and horizontal multinationals: a general equilibrium approach using the "knowledge capital model"

Kazuhiko Oyamada and Uchida Yoko

No 290, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: One of the key factors behind the growth in global trade in recent decades is an increase in intermediate input as a result of the development of vertical production networks (Feensta, 1998). It is widely recognized that the formation of production networks is due to the expansion of multinational enterprises' (MNEs) activities. MNEs have been differentiated into two types according to their production structure: horizontal and vertical foreign direct investment (FDI). In this paper, we extend the model presented by Zhang and Markusen (1999) to include horizontal and vertical FDI in a model with traded intermediates, using numerical general equilibrium analysis. The simulation results show that horizontal MNEs are more likely to exist when countries are similar in size and in relative factor endowments. Vertical MNEs are more likely to exist when countries differ in relative factor endowments, and trade costs are positive. From the results of the simulation, lower trade costs of final goods and differences in factor intensity are conditions for attracting vertical MNEs.

Keywords: Developing countries; Developed countries; Foreign investments; International business enterprises; Foreign Direct Investment; Knowledge-Capital Model (search for similar items in EconPapers)
JEL-codes: F21 F23 (search for similar items in EconPapers)
Date: 2011-03-01
New Economics Papers: this item is included in nep-cmp and nep-int
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Citations: View citations in EconPapers (2)

Published in IDE Discussion Paper = IDE Discussion Paper, No. 290. 2011-03-01

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