Multiproduct multinationals and reciprocal FDI dumping

Global patterns of FDI and trade are remarkably similar, yet mainstay theory has them as substitutes. We posit a model where multiproduct, final-goods firms simultaneously engage in intraindustry FDI and intraindustry trade. The logic behind this two-way FDI is analogous to that of two-way trade in the Brander-Krugman reciprocal-dumping model. Namely, multiproduct firms use tmde costs to reduce inter-variety competition by placing production of some varieties abroad. Since the varieties are differentiated, all varieties are sold in all markets, Thus while FDI displaces some exports, it also creates trade via reverse imports. This naturally leads to parallelism in the trade and FDI patterns. (C) 2001 Elsevier Science B.V. All rights reserved.