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Integration and Welfare with Horizontal Multinationals

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  • K. Yamamoto
  • T. Morita
  • F. Cerina

    ()

Abstract

We construct a two-country model with national and multinational (multiplant) firms and we investigate the effect of trade integration on welfare both at the country and at the aggregate level. When national and multinational firms coexist in equilibrium, results crucially depend on the share of industrial profits owned by a country and on the effective degree of trade integration itself. In this case, if the share of profits owned by a country is too small, then trade integration may integration on welfare is negative and positive otherwise. By contrast, when the share of profits is intermediate, the relation between trade integration and welfare is U-shaped so that, in each country, there is a welfare-minimizing degree of integration. Hence a marginal increase of the latter might be harmful (both at the country and at the aggregate level) when countries are not sufficiently well integrated while a sufficiently strong improvement in economic integration is always good both at the country and at the aggregate level. Finally, it is shown that when the distribution of global profits is uneven, liberalisation policies always increase welfare inequality.

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Bibliographic Info

Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 201307.

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Date of creation: 2013
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Handle: RePEc:cns:cnscwp:201307

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Keywords: trade costs; multinational firms;

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  1. José Pedro Pontes, 2001. "Multinational Firms, Integration and Economic Growth," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2001/11, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  2. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 44(3), pages 589-630, September.
  3. Behrens, Kristian & Gaigne, Carl & Ottaviano, Gianmarco I.P. & Thisse, Jacques-Francois, 2007. "Countries, regions and trade: On the welfare impacts of economic integration," European Economic Review, Elsevier, Elsevier, vol. 51(5), pages 1277-1301, July.
  4. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, Elsevier, vol. 16(3-4), pages 205-226, May.
  5. Markusen, James R. & Venables, Anthony J., 1998. "Multinational firms and the new trade theory," Journal of International Economics, Elsevier, Elsevier, vol. 46(2), pages 183-203, December.
  6. Peretto, Pietro F., 2003. "Endogenous market structure and the growth and welfare effects of economic integration," Journal of International Economics, Elsevier, Elsevier, vol. 60(1), pages 177-201, May.
  7. Laura Alfaro & Maggie X. Chen, 2012. "Selection, Reallocation, and Spillover: Identifying the Sources of Gains from Multinational Production," NBER Working Papers 18207, National Bureau of Economic Research, Inc.
  8. S. Lael Brainard, 1993. "A Simple Theory of Multinational Corporations and Trade with a Trade-Off Between Proximity and Concentration," NBER Working Papers 4269, National Bureau of Economic Research, Inc.
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