Multinational firms, location and trade

I will present results from a relatively small number of papers which attempt to integrate multinational firms into general-equilibrium trade models and which attempt to endogenise the location pattern of firms and their decisions to horizontally or vertically integrate across national borders. By 'horizontal', I refer to firms which geographically fragment the production process by stages. The paper will not be a survey in the traditional sense of the word, and thus will not survey the individual contributions of a large number of authors and papers. Instead, I will adopt a more 'pedagogic' approach, working through the structure, assumptions, and results from a couple of existing models to illustrate how the multinational can be incorporated into trade theory and how such models then differ from standard models of the new trade theory. The results of such models are encouraging in that these are at least superficially closely consistent iwth a range of stylised facts. In the next section, I will draw on a wide range of empirical studies in order to identify exactly what these stylised facts are. In Section 3, I briefly reiterate John Dunning's (1977 and 1993) OLI framework, which I find to be a useful organising tool. I then link the stylised facts with the OLI framework to create a conceptual model consistent iwth both, which I call the 'knowledge-capital model.' Section 4 outlines a formal version of this model and presents results on how country and technology characteristics interact to produce a pattern of national and multinational firms in equilibrium. I examine the implications for a variety of important questions, including the direction of trade, the volume of trade, and the effects of direct investment on factor markets and agglomeration tendencies in Sections 5, 6 and 7. Section 8 suggests testable hypotheses derived from the formal models.