Working Paper Series
James R. Markusen, Anthony J. Venables, Denise Eby Konan and Kevin H. Zhang
A Unified Treatment of Horizontal Direct Investment, Vertical Direct Investment, and the Pattern of Trade in Goods and Services
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: TRANSNATIONAL CORPORATIONS; INTERNATIONAL TRADE; (follow links to similar papers)
JEL-Codes: F10; F21; F23; (follow links to similar papers)
36 pages, August 1996
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