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Trade and the Internationalization of Production

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  • Jörn Kleinert

Abstract

Whereas many empirical studies show that the internationalization of production is driven by falling distance costs, theoretical models of the endogenous emergence of multinational enterprises predict the opposite. This paper argues that this dichotomy can be resolved if the production process is modeled more realistically by taking the use of intermediate goods into account. The argument is based on a two-country general equilibrium model set up to study companiesÂ’ internationalization strategies. Companies use specific intermediate goods in their production and can choose between exports and foreign production. In choosing between these alternatives, they face a trade-off between higher variable distance costs when exporting and additional fixed costs when producing abroad. With falling distance costs, exports increase. Furthermore, the profitability of foreign production increases relative to the profitability of exports if the share of intermediate goods used is not too small. With falling distance costs, it might therefore pay for a company to become a multinational enterprise.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1104.

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Length: 44 pages
Date of creation: Apr 2002
Date of revision:
Handle: RePEc:kie:kieliw:1104

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Related research

Keywords: Trade; Multinational Enterprise; General Equilibrium;

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References

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  1. Robert C. Feenstra, . "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics.
  2. Jeffrey A. Frankel, 2000. "Globalization of the Economy," NBER Working Papers 7858, National Bureau of Economic Research, Inc.
  3. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  4. Markusen, James R. & Venables, Anthony J., 1998. "Multinational firms and the new trade theory," Journal of International Economics, Elsevier, vol. 46(2), pages 183-203, December.
  5. Volker Nitsch, 2000. "National borders and international trade: evidence from the European Union," Canadian Journal of Economics, Canadian Economics Association, vol. 33(4), pages 1091-1105, November.
  6. David Hummels & Dana Rapoport & Kei-Mu Yi, 1998. "Vertical specialization and the changing nature of world trade," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 79-99.
  7. Jose Campa & Linda S. Goldberg, 1997. "The Evolving External Orientation of Manufacturing Industries: Evidence from Four Countries," NBER Working Papers 5919, 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.
  9. Head, Keith & Ries, John, 2001. "Overseas Investment and Firm Exports," Review of International Economics, Wiley Blackwell, vol. 9(1), pages 108-22, February.
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Cited by:
  1. Jörn Kleinert, 2003. "On the Coexistence of National Companies and Multinational Enterprises," Kiel Working Papers 1181, Kiel Institute for the World Economy.

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