Trade, Multinational Sales and FDI in a Three-Factors Model

34 Pages Posted: 29 May 2001

See all articles by Michael Pfaffermayr

Michael Pfaffermayr

University of Innsbruck - Department of Economics; Austrian Institute of Economic Research

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment; ETH Zürich; Ludwig-Maximilians University of Munich; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: February 13, 2001

Abstract

The overwhelming importance of multinational activities as well as the coexistence of exporters and multinationals within the developed countries demand for theoretical models which provide a convincing explanation of simultaneous two-way trade and horizontal multinational activities. We present a model with three factors of production to disentangle the twofold importance of headquarters for their affiliates into a know-how and a capital serving part (FDI). Multinationals trade-off the incentives for a high proximity to the market and a concentration of production facilities. We simulate the model to derive predictions about the impact of trade costs, plant set-up costs, fixed multinational network costs, relative country size and factor endowments on exports, multinational sales and FDI. We find that the effects are not uniform for multinational sales and FDI. Whereas exports and affiliate sales increase with the similarity in country size, FDI is more likely to increase monotonously with the sending country's size.

Keywords: Multinational firms, new trade theory

JEL Classification: F12, F23

Suggested Citation

Pfaffermayr, Michael and Egger, Peter H., Trade, Multinational Sales and FDI in a Three-Factors Model (February 13, 2001). Available at SSRN: https://ssrn.com/abstract=269592 or http://dx.doi.org/10.2139/ssrn.269592

Michael Pfaffermayr (Contact Author)

University of Innsbruck - Department of Economics ( email )

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Peter H. Egger

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