Multinational Firms and the Theory of International Trade

Abstract

Despite the great importance of multinational firms in international economics, theoretical and empirical research on these firms has generally been conducted separately from that on international trade. In this book, James Markusen provides a comprehensive integration of the two fields. Drawing on twenty years of research, he focuses on the interaction of scale economies, trade costs, factor endowments, and imperfect competition. He analyzes decisions about whether to build or acquire a foreign plant separately from decisions about where to raise the financing. Markusen begins with the simplest possible partial equilibrium models and works systematically toward a full-fledged general equilibrium model with both horizontal and vertical foreign direct investment. He offers empirical tests of hypotheses derived from the theoretical models. The notation is unified throughout, distinctions between models are explained with thoroughly explained derivations, and numerous graphs support the analysis.

Location Choice and Employment Decisions: A Comparison of German and Swedish Multinationals

“…Higher GDP levels thus seem to be associated with a smaller impact of skill endowments. This finding is consistent with the predictions of the knowledge capital model (Markusen 2002) and the idea that large skill-scarce countries might be as attractive as small skill-abundant ones. Applying the point estimates from specification (1) tively skill-scarce countries with small and large market sizes, respectively, we find that a unit increase in the skill level (i.e., an increase in the attainment of higher schooling by one percentage point) in Hungary (India) raises the relative risk ratio of locating production there by about 15 (7) percent.…”

Estimating the Impact of Time-Invariant Variables on FDI with Fixed Effects

“…More recent contributions include Baltagi et al (2007). The knowledge capital model, discussed in detail by Markusen (2002), incorporates aspects of both vertical and horizontal FDI. 4 As detailed below, we use bilateral stock and sales data involving the United States, bilateral stock data involving an OECD country, and inbound and outbound flows from the World Bank.…”

Comparative advantage FDI? A host country perspective

“…The theoretical determinants of FDI, in particular those that matter for horizontal (market access seeking) versus vertical (comparative advantage) multinationals are drawn from the literature, mainly from the seminal study by Brainard (1997) and the pioneering work of Markusen (1997Markusen ( , 2002, which was put to an empirical test in Carr et al (2001), Markusen and Maskus (2002) and Blonigen et al (2003). Markusen (1997Markusen ( , 2002 refers to his unified approach as the ''knowledge-capital model'' of the multinational enterprise. This model entails as special cases those of horizontal and vertical multinationals, as well as purely national firms.…”

“…The low share of EU countries in 2000 is due to the French Telekom selling its 2.5 billion US$ stake in the Mexican telephone company TELMEX which it had acquired 10 years earlier. 7 See Markusen (1997Markusen ( , 2002 for full details of the model. Consequently, foreign investment that is based on a comparative advantage motive should flow into industries that are relatively low-skilled labor intensive.…”

“…While there is no consensus in the literature, recent evidence suggests that vertical spillovers are more likely than horizontal ones. 1 While the early literature has treated horizontal (Markusen 1984) and vertical (Helpman 1984) multinationals separately, recent work has provided a unified general equilibrium framework called the ''knowledge-capital'' model, in which all types of multinationals arise endogenously (Markusen 2002; see Markusen and Maskus 2001 for a survey). When the theory is taken to the data, the vertical model is strongly rejected in favor of the horizontal one (Carr et al 2001;Markusen and Maskus 2002;Blonigen et al 2003).…”