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Multinationals, intra-firm trade and FDI: A simple model

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Abstract

This 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.

Suggested Citation

  • Theresa Carpenter, 2005. "Multinationals, intra-firm trade and FDI: A simple model," IHEID Working Papers 01-2005, Economics Section, The Graduate Institute of International Studies.
  • Handle: RePEc:gii:giihei:heiwp01-2005
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    1. Brainard, S Lael, 1997. "An Empirical Assessment of the Proximity-Concentration Trade-off between Multinational Sales and Trade," American Economic Review, American Economic Association, pages 520-544.
    2. Markusen, James R. & Venables, Anthony J., 2000. "The theory of endowment, intra-industry and multi-national trade," Journal of International Economics, Elsevier, pages 209-234.
    3. Baldwin, Richard E. & Ottaviano, Gianmarco I. P., 2001. "Multiproduct multinationals and reciprocal FDI dumping," Journal of International Economics, Elsevier, pages 429-448.
    4. James R. Markusen, 1998. "Multinational Firms, Location and Trade," The World Economy, Wiley Blackwell, vol. 21(6), pages 733-756, August.
    5. Bernhofen, Daniel M., 1998. "Intra-industry trade and strategic interaction: Theory and evidence," Journal of International Economics, Elsevier, vol. 45(1), pages 77-96, June.
    6. 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.
    7. 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.
    8. Markusen, James R. & Venables, Anthony J., 1998. "Multinational firms and the new trade theory," Journal of International Economics, Elsevier, pages 183-203.
    9. Yeats, Alexander J., 1998. "Just how big is global production sharing?," Policy Research Working Paper Series 1871, The World Bank.
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    Keywords

    Multinationals; FDI; Intra-firm trade.;

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