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A Unified Treatment of Horizontal Direct Investment, Vertical Direct Investment, and the Pattern of Trade in Goods and Services

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Author Info
James R. Markusen
Anthony J. Venables
Denise Eby Konan
Kevin H. Zhang

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Abstract

This paper contributes to research endogenizing multinational firms in general-equilibrium trade models. We attempt to integrate separate contributions on horizontal multinationals which produce the same final product in multiple locations, with work on vertical multinationals, which geographically fragment production by stages. Previously derived results now emerge as special cases of a more general model. Vertical multinationals dominate when countries are very different in relative factor endowments. Horizontal multinationals dominate when the countries are similar in size and in relative endowments, and trade costs are moderate to high. In some cases, foreign investment or trade liberalization leads to a reversal in the direction of trade. Investment liberalization can also lead to an increase in the volume of trade and produces a strong tendency toward factor-price equalization. Thus direct investment can be a complement to trade in both a volume-of-trade sense and in a welfare sense.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5696.

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Date of creation: Aug 1996
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Handle: RePEc:nbr:nberwo:5696

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Find related papers by JEL classification:
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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  1. Markusen, James R, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-89, Spring. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. Markusen, James R. & Venables, Anthony J., 1996. "The Theory of Endowment, Intra-Industry and Multinational Trade," CEPR Discussion Papers 1341, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. James R. Markusen & Anthony J. Venables, 1996. "Multinational Production, Skilled Labor and Real Wages," NBER Working Papers 5483, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. James R. Markusen & Anthony J. Venables, 1995. "Multinational Firms and The New Trade Theory," NBER Working Papers 5036, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Markusen, James R., 1983. "Factor movements and commodity trade as complements," Journal of International Economics, Elsevier, vol. 14(3-4), pages 341-356, May. [Downloadable!] (restricted)
  7. Denise Eby Konan, 1996. "The Vertical Multinational Enterprise and International Trade," Working Papers 199601, University of Hawaii at Manoa, Department of Economics. [Downloadable!]
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  8. Helpman, Elhanan, 1985. "Multinational Corporations and Trade Structure," Review of Economic Studies, Blackwell Publishing, vol. 52(3), pages 443-57, July. [Downloadable!] (restricted)
  9. S. Lael Brainard, 1993. "An Empirical Assessment of the Factor Proportions Explanation of Multi-National Sales," NBER Working Papers 4583, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
  11. Teece, David J, 1977. "Technology Transfer by Multinational Firms: The Resource Cost of Transferring Technological Know-how," Economic Journal, Royal Economic Society, vol. 87(346), pages 242-61, June. [Downloadable!] (restricted)
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