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The Vertical Multinational Enterprise and International Trade

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  • Konan, Denise Eby

Abstract

This paper analyzes an endogenous vertical multinational enterprise by explicitly modeling a distortion in the intermediate goods sector. Firms invest abroad to lower the cost of multistage production. The implications for international trade and investment differ markedly from the conventional wisdom of multinationals. Particularly, intrafirm trade in intermediates implies vertical investment complements rather than substitutes for trade. The decision to become a multinational depends on the level on foreign factor prices, the nature of the competition with foreign suppliers, transport, tariffs, and subsidiary plant costs. Marginal change in tariff may result in unintended welfare jumps as firm configuration shifts. Copyright 2000 by Blackwell Publishing Ltd.

Suggested Citation

  • Konan, Denise Eby, 2000. "The Vertical Multinational Enterprise and International Trade," Review of International Economics, Wiley Blackwell, vol. 8(1), pages 113-125, February.
  • Handle: RePEc:bla:reviec:v:8:y:2000:i:1:p:113-25
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    References listed on IDEAS

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    1. Spencer, Barbara J. & Jones, Ronald W., 1992. "Trade and protection in vertically related markets," Journal of International Economics, Elsevier, pages 31-55.
    2. Konan, Denise Eby, 1996. "Transfer Pricing and Strategic Taxation of Globally Joint Inputs," Review of International Economics, Wiley Blackwell, pages 202-210.
    3. Horstmann, Ignatius J. & Markusen, James R., 1992. "Endogenous market structures in international trade (natura facit saltum)," Journal of International Economics, Elsevier, pages 109-129.
    4. Spencer, Barbara J. & Jones, Ronald W., 1992. "Trade and protection in vertically related markets," Journal of International Economics, Elsevier, pages 31-55.
    5. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, pages 205-226.
    6. Horstmann, Ignatius J & Markusen, James R, 1989. "Firm-Specific Assets and the Gains from Direct Foreign Investment," Economica, London School of Economics and Political Science, vol. 56(221), pages 41-48, February.
    7. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-471, June.
    8. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, pages 169-189.
    9. Konan, Denise Eby, 1997. "Strategic taxation of the multinational enterprise: A new argument for double taxation," Journal of Public Economics, Elsevier, pages 301-309.
    10. Elhanan Helpman, 1985. "Multinational Corporations and Trade Structure," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 443-457.
    11. Ethier, Wilfred J. & Horn, Henrik, 1990. "Managerial control of international firms and patterns of direct investment," Journal of International Economics, Elsevier, pages 25-45.
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    Citations

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    Cited by:

    1. James R. Markusen & Anthony J. Venables & Denise Eby Konan & Kevin H. Zhang, 1996. "A Unified Treatment of Horizontal Direct Investment, Vertical Direct Investment, and the Pattern of Trade in Goods and Services," NBER Working Papers 5696, National Bureau of Economic Research, Inc.
    2. Wang, Leonard F.S. & Chen, Tai-Liang, 2011. "Mixed oligopoly, optimal privatization, and foreign penetration," Economic Modelling, Elsevier, vol. 28(4), pages 1465-1470, July.
    3. Miller, Andrew D. & Langley, Suchada V. & Chambers, William, 2003. "Current Issues Affecting Trade And Trade Policy: An Annotated Literature Review," Working Papers 14606, International Agricultural Trade Research Consortium.
    4. Erdey, László, 2004. "A működőtőke-áramlás a telephelyválasztás elméletének tükrében
      [The flow of operating capital in the light of the theory of location choice]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(5), pages 472-494.

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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