Multinational Firms and The New Trade Theory

James Markusen and Anthony Venables

No 5036, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A model is constructed in which multinational firms may arise endogenously. Multinationals exist in equilibrium when transport and tariff costs are high, incomes are high, and firm-level scale economies are important relative to plant-level scale economies. Less obvious, multinationals are more important in total economic activity when countries are more similar in incomes, relative factor endowments, and technologies. The model may thus be useful in explaining several stylized facts, including (a) the growing importance of direct investment relative to trade among the developed countries over time and (b) the greater ratio of investment to trade among the developed countries relative to this ratio for 'north-south' or 'south-south' economic relationships. The model offers predictions about the volume of trade that contrast with those of the 'new trade theory', predicting that trade at first rises and then falls as countries converge in incomes, relative endowments, and technologies. Welfare is also considered, and it is shown that direct investment makes the smaller (or high cost) country better off, but may make the larger (or low cost) country worse off.

JEL-codes: F12 F23 (search for similar items in EconPapers)
Date: 1995-02
Note: ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (83)

Published as Journal of International Economics 46 (1998), pp. 183-204.

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Chapter: Multinational firms and the new trade theory (2021)
Journal Article: Multinational firms and the new trade theory (1998)
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