Multinationals, intra-firm trade and FDI: A simple model
AbstractThis paper models trade and FDI in a world consisting of two symmetric countries. Using a monopolistic competition model of international trade which includes positive trade costs and endogenous multinational firms, we introduce an intermediate good and allow firms to fragment production internationally. The result is that under certain conditions, identical countries engage in both intra-industry FDI and intra-industry, intra-firm trade. This result provides a theoretical explanation for a well-observed but little explained phenomenon in the overlap between the theory of international trade and the theory of multinational enterprises. Examination of welfare demonstrates that firms make location choices that happen to maximise consumer welfare.
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Bibliographic InfoPaper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 01-2005.
Date of creation: May 2005
Date of revision:
Multinationals; FDI; Intra-firm trade.;
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