Multinational Firms and The New Trade Theory

James R. Markusen, Anthony J. Venables

NBER Working Paper No. 5036
Issued in February 1995
NBER Program(s):   ITI

A model is constructed in which multinational firms may arise endogenously. Multinationals exist in equilibrium when transport and tariff costs are high, incomes are high, and firm-level scale economies are important relative to plant-level scale economies. Less obvious, multinationals are more important in total economic activity when countries are more similar in incomes, relative factor endowments, and technologies. The model may thus be useful in explaining several stylized facts, including (a) the growing importance of direct investment relative to trade among the developed countries over time and (b) the greater ratio of investment to trade among the developed countries relative to this ratio for 'north-south' or 'south-south' economic relationships. The model offers predictions about the volume of trade that contrast with those of the 'new trade theory', predicting that trade at first rises and then falls as countries converge in incomes, relative endowments, and technologies. Welfare is also considered, and it is shown that direct investment makes the smaller (or high cost) country better off, but may make the larger (or low cost) country worse off.

download in pdf format
   (486 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5036

Published: Journal of International Economics 46 (1998), pp. 183-204. citation courtesy of

Users who downloaded this paper also downloaded these:
Markusen, Venables, Konan, and Zhang w5696 A Unified Treatment of Horizontal Direct Investment, Vertical Direct Investment, and the Pattern of Trade in Goods and Services
Carr, Markusen, and Maskus w6773 Estimating the Knowledge-Capital Model of the Multinational Enterprise
Ossa w16388 A 'New Trade' Theory of GATT/WTO Negotiations
Brainard w4580 An Empirical Assessment of the Proximity-Concentration Tradeoff between Multinational Sales and Trade
Brainard w4269 A Simple Theory of Multinational Corporations and Trade with a Trade-Off Between Proximity and Concentration
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us