Economics Dictionary of ArgumentsHome
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| Multinational corporations: Multinational corporations (MNCs) are companies operating in multiple countries, with headquarters in one nation and business operations in others. See also Taxation, International relations._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Robert C. Feenstra on Multinational Corporations - Dictionary of Arguments
Feenstra I 11-1 Multinational corporations/Feenstra: The classic treatment of a multinational is that it has some intangible asset (such as knowledge of a production process) that it can use to its advantage in a foreign market. It must decide whether to simply export there, or to invest in that market by building a plant and selling the product, or whether to engage in a joint venture or other contractual arrangement with a foreign firm to produce the good. Notice that this classic statement of the problem can equally well work in reverse, whereby the acquisition of a foreign firm can bring with it some knowledge of value to the purchaser, that could not be obtained by simply buying the products of that foreign firm.* >Foreign direct investment. Feenstra I 11-3 We see that the decision to engage in FDI (Foreign direct investment) by a multinational therefore involves three interrelated aspects - ownership of an asset, location to produce, and whether to keep the asset internal to the firm - and these comprise the so-called “OLI framework” of multinational activity (Dunning, 1977(2), 1981(3)). Tariffs: [The] phenomenon of “tariff-jumping” FDI is a typical occurrence in import-substitution regimes, but is not restricted to the developing countries: many industrialized countries have used tariffs or quotas to induce the entry of foreign firms. This policy has some economic rationale, since the entry of foreign firms in simple models leads to a welfare gain due to increased domestic wages. The link between foreign investment and wages is therefore an important topic for empirical research. In Mundell’s(4) analysis, domestic wages are not affected by the foreign investment (due to “factor price insensitivity” in the HO [Heckscher-Ohlin] model), but it is still the case that the deadweight loss of the tariff is reduced due to the entry of foreign firms. Multinationals need not lead to capital flows between countries, however, and may instead just involve the ownership and location of firms. Feenstra I 11-4 (…) [We distinguish] vertical from horizontal multinationals. An example of the former case is a firm that has headquarters in one country but does production in another to obtain lower factor prices there (Helpman, 1984)(5). The latter case occurs when a firm decides to duplicate production facilities and sell locally in two or more countries, due to tariffs or other barriers between them (Markusen, 1984(6), 2002(7)). Equilibrium: [There are] conditions under which a particular type of multinational is most likely to arise in equilibrium, and once again, find that trade policies can have a significant impact on multinational location. Feenstra I 11-12 Def Vertical multinational: (…) the multinational chooses to operate its headquarters in one country and its production facilities in another (…). The vertical case was first analyzed by Helpman (1984c)(8) in a two-factor framework with monopolistic competition. The incentive to operate headquarters in one country and production in another arises due to factor price differences across the countries. Def Horizontal multinational: (…) operates its headquarters in one country but has production facilities in multiple countries. Feenstra I 11-21 Horizontal FDI requires that the gains from selling locally and thereby avoiding transport costs more than offset the plant-specific fixed costs. This case has been analyzed in a series of papers beginning with Markusen (1984)(6) and culminating in the book by Markusen (2002)(7). * Blonigen (1997)(1) argues that increased inflows of Japanese acquisition FDI into the U.S. during 1985-1990 were motivated by the desire to acquire the knowledge assets of U.S. firms, combined with the low value of the dollar. Notice that by this argument, FDI flows depend on the level of exchange rates. 1. Blonigen, Bruce, 1997, “Firm-Specific Assets and the Link Between Exchange Rates and Foreign Direct Investment,” American Economic Review, June, 87(3), 447-466. 2. Dunning, John H., 1977, “Trade, Location of Economic Activity and the MNE: A Search for an Eclectic Approach,” in B. Ohlin, P.O. Hesselborn and P.M. Wijkman, eds. The International Allocation of Economic Activity. London: Macmillan, 395-418. 3. Dunning, John H., 1981, International Production and the Multinational Enterprise. London: George Allen and Unwin. 4. Mundell, Robert A., 1957, “International Trade and Factor Mobility,” American Economic Review, 47, 321-335. 5. Helpman, Elhanan, 1984, “The Factor Content of Foreign Trade,” Economic Journal, 94, 84-94. 6. Markusen, James R., 1984, “Multinationals, Multi-Plant Economies, and the Gains from Trade,” Journal of International Economics, 16, 205-226. 7. Markusen, James R., 2002, Multinational Firms and the Theory of International Trade. Cambridge: MIT Press. 8. Helpman, Elhanan, 1984c, “A Simple Theory of International Trade with Multinational Corporations,” Journal of Political Economy, 451-471._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Feenstra I Robert C. Feenstra Advanced International Trade University of California, Davis and National Bureau of Economic Research 2002 |
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