Working Paper: NBER ID: w5696
Authors: James R. Markusen; Anthony J. Venables; Denise Eby Konan; Kevin H. Zhang
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.
Keywords: multinational firms; trade patterns; direct investment; international trade
JEL Codes: F21; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| factor endowment differences (F16) | vertical multinationals (Type V firms) (F23) |
| similarity in country characteristics (O57) | horizontal multinationals (Type M firms) (F23) |
| trade costs (F19) | horizontal multinationals (Type M firms) (F23) |
| investment liberalization (F21) | reversal in direction of trade (F14) |
| investment liberalization (F21) | increase in trade volume (F10) |
| direct investment complements trade in volume and welfare (F10) | increase in trade volume (F10) |
| investment liberalization (F21) | factor-price equalization (F16) |