Multinational Firms

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Abstract
The field of international trade developed in the modern era, largely as a study of trade in goods. Although it had many antecedents, an industrial-organization approach to trade was developed in the 1980s. This approach incorporated elements of imperfect competition, increasing returns to scale, and product differentiation into general equilibrium trade models. Yet this new theory, however welcome, was largely disjoint from the study of multinational corporations (MNCs). This chapter uses foreign affiliate production data to consider sales to the host-country market and export sales. It first generates separate predictions of how local sales versus export sales should be related to parent-country and host-country characteristics. It then outlines the knowledge-capital model of the MNC. It shows that local (host country) market size is more important for production for local sales than for production for export sales. Host-country skilled labor scarcity is important for export production relative to production for local sales. Investment and trade-cost barriers in the host country affect production for export more negatively than they do production for local sales.

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