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The Vertical Multinational Enterprise and International Trade

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  • Denise Eby Konan

Abstract

By explicitly modeling distortion in the intermediate goods sector, I develop a model of an endogenous vertical multinational enterprise. Firms invest abroad to lower cost of multi-stage production. The implications for international trade and investment differ markedly from the conventional wisdom of multinationals. Particularly, intra-firm trade in intermediates implies vertical investment complements rather than substitutes for trade. The decision to become a multinational depends on the level of foreign factor prices, nature of competition with foreign suppliers, transport, tariff, and subsidiary plant costs. Marginal change in tariff may result in welfare jumps as firm configuration shifts.

Suggested Citation

  • Denise Eby Konan, 1996. "The Vertical Multinational Enterprise and International Trade," Working Papers 199601, University of Hawaii at Manoa, Department of Economics.
  • Handle: RePEc:hai:wpaper:199601
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    File URL: http://www.economics.hawaii.edu/research/workingpapers/88-98/WP_96-1.pdf
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    References listed on IDEAS

    as
    1. Spencer, Barbara J. & Jones, Ronald W., 1992. "Trade and protection in vertically related markets," Journal of International Economics, Elsevier, vol. 32(1-2), pages 31-55, February.
    2. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
    3. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
    4. Konan, Denise Eby, 1996. "Transfer Pricing and Strategic Taxation of Globally Joint Inputs," Review of International Economics, Wiley Blackwell, vol. 4(2), pages 202-210, June.
    5. Horstmann, Ignatius J. & Markusen, James R., 1992. "Endogenous market structures in international trade (natura facit saltum)," Journal of International Economics, Elsevier, vol. 32(1-2), pages 109-129, February.
    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. Konan, Denise Eby, 1997. "Strategic taxation of the multinational enterprise: A new argument for double taxation," Journal of Public Economics, Elsevier, vol. 63(2), pages 301-309, January.
    9. Elhanan Helpman, 1985. "Multinational Corporations and Trade Structure," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 443-457.
    10. Ethier, Wilfred J. & Horn, Henrik, 1990. "Managerial control of international firms and patterns of direct investment," Journal of International Economics, Elsevier, vol. 28(1-2), pages 25-45, February.
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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. Markusen, James R. & Venables, Anthony J. & Eby Konan, Denise & Zhang, Kevin H., 1996. "A Unified Treatment of Horizontal Direct Investment, Vertical Direct Investment, and the Pattern of Trade in Goods and Services," Working Paper Series 465, Research Institute of Industrial Economics.
    5. Ashok Deo Bardhan & Subhrajit Guhathakurta, 2004. "Global Linkages of Subnational Regions: Coastal Exports and International Networks," Contemporary Economic Policy, Western Economic Association International, vol. 22(2), pages 225-236, April.

    More about this item

    Keywords

    multinational enterprise; vertical integration;

    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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