NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Simple Theory of Multinational Corporations and Trade with a Trade-Off Between Proximity and Concentration

S. Lael Brainard

NBER Working Paper No. 4269
Issued in February 1993
NBER Program(s):   ITI

This paper develops a two-sector, two-country model, where firms in a differentiated products sector choose between exporting and multinational expansion as alternative modes of foreign market penetration, based on a trade-off between proximity and concentration advantages. The differentiated sector is characterized by multi-stage production, with increasing returns at the corporate level associated with some activity such as R&D, scale economies at the plant level, and a variable transport cost that rises with distance. A pure multinational equilibrium, where two-way horizontal expansion across borders completely supplants two-way trade in differentiated products, is possible even in the absence of factor proportion differences. It is more likely the greater are transport costs relative to fixed plant costs, and the greater are increasing returns at the corporate level relative to the plant level. The model also establishes conditions for a mixed equilibrium, in which national and multinational firms coexist.

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Document Object Identifier (DOI): 10.3386/w4269

Published: Brainard, S. Lael. "An Empirical Assessment Of The Proximity-Concentration Trade-Off Between Multinational Sales And Trade," American Economic Review, 1997, v87(4,Sep), 520-544.

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