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Multinational Firms and The New Trade Theory

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  • James R. Markusen
  • Anthony J. Venables

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5036.

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Date of creation: Feb 1995
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Publication status: published as Journal of International Economics 46 (1998), pp. 183-204.
Handle: RePEc:nbr:nberwo:5036

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  1. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  2. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(3), pages 451-71, June.
  3. Ethier, Wilfred J, 1986. "The Multinational Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(4), pages 805-33, November.
  4. 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.
  5. 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.
  6. James Brander & Paul Krugman, 1982. "A 'Reciprocal Dumping' Model of International Trade," Working Papers, Queen's University, Department of Economics 513, Queen's University, Department of Economics.
  7. S. Lael Brainard, 1993. "An Empirical Assessment of the Proximity-Concentration Tradeoff between Multinational Sales and Trade," NBER Working Papers 4580, National Bureau of Economic Research, Inc.
  8. Ethier, Wilfred J. & Markusen, James R., 1996. "Multinational firms, technology diffusion and trade," Journal of International Economics, Elsevier, Elsevier, vol. 41(1-2), pages 1-28, August.
  9. Horstmann, Ignatius J. & Markusen, James R., 1992. "Endogenous market structures in international trade (natura facit saltum)," Journal of International Economics, Elsevier, Elsevier, vol. 32(1-2), pages 109-129, February.
  10. Venables, Anthony J., 1985. "Trade and trade policy with imperfect competition: The case of identical products and free entry," Journal of International Economics, Elsevier, Elsevier, vol. 19(1-2), pages 1-19, August.
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