The Vertical Multinational Enterprise and International Trade

Denise Konan

Review of International Economics, 2000, vol. 8, issue 1, 113-125

Abstract: This paper analyzes an endogenous vertical multinational enterprise by explicitly modeling a distortion in the intermediate goods sector. Firms invest abroad to lower the cost of multistage production. The implications for international trade and investment differ markedly from the conventional wisdom of multinationals. Particularly, intrafirm trade in intermediates implies vertical investment complements rather than substitutes for trade. The decision to become a multinational depends on the level on foreign factor prices, the nature of the competition with foreign suppliers, transport, tariffs, and subsidiary plant costs. Marginal change in tariff may result in unintended welfare jumps as firm configuration shifts.

Date: 2000
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Working Paper: The Vertical Multinational Enterprise and International Trade (1996)
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